Quiz 6: Cost Analysis
Business
Q 1Q 1
Dana,who is a trained yoga instructor,spends 4 hours on Monday baking and packing 10 boxes of cookies.She sells the cookies for $10 a box.Given that she can also teach yoga for $80 an hour,what is her opportunity cost of baking cookies?
A)$320
B)$100
C)$220
D)$420
E)$800
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Multiple Choice
A
Q 2Q 2
A law firm will be paid $500 to send one of its lawyers to a client to take a routine deposition.The firm can send a 2nd year lawyer whose usual billing rate is $150 per hour and who is currently working on a lucrative tax deal,or it can send a 4th year associate (billing rate $200 per hour)who is currently overseeing the selection and hiring of law students as summer associates.Based on this information,the firm should send:
A)the 2nd year lawyer because his billable rate is lower.
B)the 4th year lawyer because her billable rate is higher.
C)the 2nd year lawyer because he is currently more productive.
D)either the 2nd year lawyer or the 4th year associate since the firm receives the same $500 fee.
E)the 4th year lawyer because her current work is less valuable to the firm.
Free
Multiple Choice
E
Q 3Q 3
Bill gives up his present job in Delaware to pursue a graduate school program in New York.What is the opportunity cost of his decision?
A)The difference between the cost of living in New York and in Delaware
B)The total tuition cost of the program
C)The increase in wages that he can expect as a result of higher educational qualifications
D)The wages that he forgoes when he quits his job
E)The cost of relocating to New York from Delaware
Free
Multiple Choice
D
Q 4Q 4
Accounting profit differs from economic profit because:
A)accounting cost does not include sunk cost.
B)economic cost includes all relevant opportunity costs.
C)accounting cost includes the implicit costs of production.
D)accounting cost does not include fixed cost.
E)economic cost does not include the explicit costs of production.
Free
Multiple Choice
Q 5Q 5
Amanda invests $500,000 in a new business venture.Which of the following correctly identifies the relevant opportunity cost that she faces?
A)The potential profits from the business
B)The discounted present value of future profits from the business
C)The rate of interest that could have been earned on $500,000
D)The probability of losing the initial investment of $500,000
E)The rate of return on $500,000 invested in the business
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Multiple Choice
Q 6Q 6
Assume that an investor invests $100,000 in a business venture.He earns an economic profit of $5,000.If the rate of return on an investment of equal risk is 10%,what is the rate of return that he earned on his investment?
A)25%
B)15%
C)10%
D)5%
E)20%
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Multiple Choice
Q 7Q 7
The economic profit on an investment is zero when:
A)the total revenue from the investment exceeds the costs of the investment.
B)the revenue from the investment just covers the fixed cost of the investment.
C)the accounting profit and economic profit are equal.
D)the investment earns a normal rate of return.
E)the sunk cost of the investment is zero.
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Multiple Choice
Q 8Q 8
Which of the following is true of a firm's fixed costs?
A)A firm should shut down if it cannot cover its fixed costs.
B)Fixed costs are incurred regardless of the firm's level of output.
C)Fixed costs are the same as a firm's total costs.
D)Fixed costs are reduced to zero if the firm produces no output.
E)Accounting profit equals economic profit when fixed costs fall to zero.
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Multiple Choice
Q 9Q 9
If a firm were to stop production of its only product,the firm's total cost will be equal to _____.
A)zero
B)its total fixed cost
C)its total variable cost
D)its opportunity cost
E)its average cost
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Multiple Choice
Q 10Q 10
The money that a firm has already spent on research and development for a project should be categorized as _____ when the firm is deciding whether to make an additional investment in the project.
A)an implicit cost
B)a variable cost
C)a sunk cost
D)a marginal cost
E)an overhead cost
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Multiple Choice
Q 11Q 11
A firm produces 100 units of output at an average variable cost of $5 and incurs a total fixed cost of $700.Which of the following is true?
A)The firm's average total cost is $12.
B)The firm's total variable cost is $1,200.
C)The firm's marginal cost is constant and equal to $5.
D)The firm's average fixed cost is $5.
E)The firm's total cost is $500.
Free
Multiple Choice
Q 12Q 12
A firm that produces and sells toys has a factory located in New Town built on a 50,000 square feet plot of land.The following table gives information about the costs of production and output of the firm.
Table 6-1
-Refer to Table 6-1.What is the average fixed cost of producing a toy?
A)$38
B)$20
C)$40
D)$51
E)$30
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Multiple Choice
Q 13Q 13
A firm that produces and sells toys has a factory located in New Town built on a 50,000 square feet plot of land.The following table gives information about the costs of production and output of the firm.
Table 6-1
-Refer to Table 6-1.What is the average variable cost of producing a toy?
A)$0.40
B)$3.80
C)$5.20
D)$4
E)$5
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Multiple Choice
Q 14Q 14
In the short run,if the marginal product of labor is decreasing,then:
A)marginal cost must be increasing.
B)the marginal revenue of the firm must be decreasing.
C)average total cost must be increasing.
D)average variable cost must be decreasing.
E)average total cost must be decreasing.the marginal revenue product of labor must be increasing.
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Multiple Choice
Q 15Q 15
If short-run average cost is increasing then:
A)average fixed cost must be increasing.
B)marginal cost must be decreasing.
C)marginal cost must be greater than short-run average cost.
D)the production function displays decreasing returns to scale.
E)average variable cost must be decreasing.
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Multiple Choice
Q 16Q 16
When average total cost is at its minimum point:
A)marginal cost is also at its minimum point.
B)marginal cost is equal to zero.
C)marginal cost is constant.
D)average total cost is equal to marginal cost.
E)the firm is maximizing profit.
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Multiple Choice
Q 17Q 17
The average fixed cost for a firm _____.
A)is constant at all levels of output
B)is increasing over all levels of output
C)first increases at an increasing rate and then declines
D)first decreases and then increases as output increases
E)is decreasing over all levels of output
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Multiple Choice
Q 18Q 18
Which of the following is true of the long run?
A)The average fixed cost is higher in the long run than in the short run.
B)All inputs costs are variable in the long run.
C)The firm produces at a higher cost in the long run than in the short run.
D)All inputs to production are kept fixed in the long run.
E)Total costs are greater than variable costs in the long run.
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Multiple Choice
Q 19Q 19
When a firm's production function exhibits constant returns to scale:
A)the short-run average cost curve will be horizontal.
B)the long-run average cost curve will be U-shaped.
C)the long-run marginal cost curve will be upward sloping.
D)the short-run average variable cost curve will be downward sloping.
E)the long-run average cost curve will be horizontal.
Free
Multiple Choice
Q 20Q 20
The following figure shows the long-run average cost curve of a firm.
Figure 6-1
-Refer to Figure 6-1.The production function of the firm displays constant returns to scale when output is increased from _____.
A)0A to 0E
B)0C to 0D
C)0D to 0E
D)0A to 0B
E)0B to 0D
Free
Multiple Choice
Q 21Q 21
The following figure shows the long-run average cost curve of a firm.
Figure 6-1
-Refer to Figure 6-1.The production function of the firm displays increasing returns to scale at all levels of output between _____.
A)0A to 0E
B)0C to 0D
C)0D to 0E
D)0A to 0B
E)0B to 0E
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Multiple Choice
Q 22Q 22
The following figure shows the long-run average cost curve of a firm.
Figure 6-1
-Refer to Figure 6-1.The production function of the firm displays decreasing returns to scale at all levels of output between _____.
A)0A to 0E
B)0C to 0D
C)0D to 0E
D)0A to 0B
E)0B to 0D
Free
Multiple Choice
Q 23Q 23
Mexico is capable of producing 20 auto tires or 16 microcircuits per labor hour.Brazil is capable of producing 24 auto tires or 24 microcircuits per labor hour.Based on this information,we can conclude that:
A)Brazil has an absolute advantage in both goods.
B)Brazil will export both goods to Mexico.
C)Mexico has a comparative advantage in microcircuits.
D)Mexico has a comparative advantage in tires.
E)Mexico will import tires from Brazil.
Free
Multiple Choice
Q 24Q 24
When the long-run average cost is minimum,the long-run marginal cost:
A)is also at its lowest value.
B)is decreasing.
C)is greater than long-run average cost.
D)is at its highest value.
E)is equal to long-run average cost.
Free
Multiple Choice
Q 25Q 25
Which of the following correctly defines the minimum efficient scale for a firm?
A)The output level at which the firm earns an abnormal profit
B)The minimum point of the firm's learning or experience curve
C)The lowest output at which minimum average cost can be achieved
D)The output level where average fixed cost is at its minimum point
E)The level of output produced when the firm is operating at full production capacity
Free
Multiple Choice
Q 26Q 26
The minimum efficient scale is important in determining:
A)the optimum level of input usage by a firm.
B)the allocation of output between the multiple plants owned by a firm.
C)the output elasticity of firms in the market.
C)whether the firm's production function exhibits increasing,constant,or decreasing returns to scale.
E)how many firms can profitably operate in a particular market.
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Multiple Choice
Q 27Q 27
The following figure shows the long-run average cost curve of a firm.
Figure 6-1
-Refer to Figure 6-1.What is the quantity that the firm will produce if it is operating at minimum efficient scale?
A)0E
B)0A
C)0C
D)0D
E)0B
Free
Multiple Choice
Q 28Q 28
Assume that the minimum efficient scale for a typical firm in an industry is 2 million units.The estimated output for the whole industry is 6 million units.Therefore,one can conclude that:
A)the industry is a natural monopoly.
B)the output produced in the industry is less than the perfectly competitive output.
C)the industry experiences increasing returns to scale.
D)the industry is likely to support 3 firms,each producing at minimum efficient scale.
E)the price in the industry is higher than the perfectly competitive price.
Free
Multiple Choice
Q 29Q 29
What is meant by economies of scope?
A)Economies of scope refers to the cost advantages from the joint production of multiple goods.
B)Economies of scope refers to the profits that firms earn when they practice price discrimination across market segments.
C)Economies of scope refers to efficiency that firms gain when they specialize in the production of one good.
D)Economies of scope refers to the efficiency gains from specialization and division of labor.
E)Economies of scope refers to the reduction in cost that accrues to a firm due to cumulative production experience and learning.
Free
Multiple Choice
Q 30Q 30
A profit-maximizing firm will produce at the level where:
A)marginal cost equals average revenue.
B)the per unit cost is minimized.
C)price equals average fixed cost.
D)marginal revenue equals marginal cost.
E)price equals average cost.
Free
Multiple Choice
Q 31Q 31
If the price of a product consistently exceeds its average cost,one can definitely conclude that the firm that sells the product:
A)is earning a normal rate of return.
B)is maximizing its long-run profit.
C)is producing at its most efficient level of output.
D)is earning a positive economic profit.
E)is producing at the minimum efficient scale.
Free
Multiple Choice
Q 32Q 32
A profit-maximizing firm should shut down in the short run if:
A)price is greater than marginal cost.
B)total revenue is less than total variable cost.
C)the firm is earning less than a normal rate of return.
D)the firm is not able to cover its overhead expenses.
E)marginal cost is higher than average cost.
Free
Multiple Choice
Q 33Q 33
A firm will continue to operate in the long run only if:
A)it earns a rate of return that is higher than the normal rate of return.
B)it earns a nonnegative economic profit.
C)it makes a positive accounting profit.
D)average cost exceeds price.
E)the average variable cost exceeds price.
Free
Multiple Choice
Q 34Q 34
A lawyer is contemplating quitting her current job with a major corporation (where she earns an annual salary of $110,000)to open her own law firm.She estimates that the total cost of operating the office will be approximately $118,000 per year.The potential revenue is estimated as $200,000 per year.Compute her accounting cost,accounting profit,economic cost,and economic profit.
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Essay
Q 35Q 35
Briefly describe the economic cost of a college graduate serving two years in the Peace Corps,an American volunteer program,in a remote South American village.
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Essay
Q 36Q 36
"All fixed costs are sunk costs and all sunk costs are fixed costs." Examine the validity of this statement.
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Essay
Q 37Q 37
The average variable cost of producing 1,2,3,and 4 units of a product is respectively equal to $5,$6,$7,and $8.Find the marginal cost of the first four units of output.
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Essay
Q 38Q 38
A firm's short-run average cost [SAC] is described by the equation: SAC = 2,000/Q + 60 + 0.2Q.Determine the equation for the firm's marginal cost [MC].What is the MC of producing the tenth unit of output?
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Essay
Q 39Q 39
A firm's production function is given by Q = 2K2 + 6L.Does this production function exhibit constant returns to scale?
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Essay
Q 40Q 40
A firm's long-run average cost curve is estimated by the equation: LAC = 1,000 - 2.5Q + 0.005Q2.What is the minimum efficient scale of production?
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Essay
Q 41Q 41
A firm produces 100 units of good A at a total cost of $1,500 and separately 200 units of good B at a cost of $2,000.By combining the production of A and B,it is possible to produce the same quantities of A and B respectively at a combined total cost of $2,800.Compute the economies of scope experienced by this firm.
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Essay
Q 42Q 42
The production manager of a clothing manufacturer estimates that the total annual cost of producing men's suits is given by the equation: C = 5,000 + 4,100Q - 8Q2 + 0.004Q3.If the market price of suits is constant,what is the shutdown level of output? What is the minimum price the firm can accept?
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Essay
Q 43Q 43
A firm produces three products A,B,and C.Long-run projected sales per year are 10,000 units of A,12,000 units of B,and 8,000 units of C.
(a)Determine whether the firm should remain in business under the following conditions:
Good A sells at $5 per unit,and average variable cost [AVC] is $3.5.Good B sells at $7.5 per unit,and AVC is $5.Good C sells at $10 per unit,and AVC is $7.50.Total fixed cost is $60,000 per year.
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Essay
Q 44Q 44
Three college students consider the option of forming a lawn care and landscaping business during their summer vacation.They estimate the following costs:
Their projected revenue depends on the number of lawns serviced.The price per job is $30.The going wage for a typical unskilled college student is about $2,400 for the summer months.Derive an equation for total accounting profit and total economic profit.Should the students launch the business if they expect to service about 200 lawn jobs during the summer?
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Essay
Q 45Q 45
Explain how each of the following events will affect the average and marginal cost curves of a firm:
i)An increase in labor costs
ii)An increase in lease payments for a facility
iii)A decrease in the cost of utilities (electricity,water heat)
iv)Stricter environmental regulation requiring installation of scrubbers on smokestacks
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Essay
Q 46Q 46
The table gives the short-run production data for a manufacturing firm.Compute average cost and marginal cost for the output levels shown in the table.
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Essay
Q 47Q 47
A firm's total cost function is: C = 50 + 6Q + 2Q2.
(a)Compute the level of output that minimizes average total cost [AC].
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Essay
Q 48Q 48
DigiWatch plans to open a new production facility to produce digital watches.The firm's estimates based on previous experience suggests that the fixed costs of the plant will be $366,000 per year,and that average variable cost will be: AVC = $7.00 + $0.002Q.
(a)Compute the total cost [C] and average cost [AC] for the first year of production at an output of 6,000 watches.
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Q 49Q 49
Explain the relationship between short-run average cost and long-run average cost.Draw an appropriate graph to illustrate your explanation.Assume constant returns to scale.
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Q 50Q 50
A firm produces output at two plants that are at different locations but are otherwise identical.The firm's cost function is C(q)= 5.3√q,where q is the quantity produced at the plant.To satisfy demand at the current market price,the firm needs to produce a total of 202,500 units of output.How should the firm divide production between the two plants in order to minimize the cost of production? Is it more profitable to produce all 202,500 units at the same plant?
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Q 51Q 51
(a)Firm K is a leading maker of light-weight,water-proof outerwear.During the winter months,demand for its main line of water-proof coats is given by: P = 800 - 0.2Q,where P denotes price in dollars and Q is quantity of units sold per month.The firm produces coats in a single plant (which it leases by the year).The total monthly cost of producing these coats is estimated to be: C = 150,000 + 400Q.Leasing the plant accounts for almost all of the $150,000 fixed cost.What is the firm's marginal cost? Find the firm's profit-maximizing output and price.If the firm's other outerwear products generate $50,000 in contribution,what is the firm's total monthly profit?
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Q 52Q 52
Explain the economic logic of the short-run shutdown rule.Why does it sometimes make sense to operate at a loss?
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Essay
Q 53Q 53
Doorway Computers manufactures PCs,and also produces the special DVD drives that go into each PC.Demand for computers is estimated to be: P = 2,000 - 0.1Q,where Q denotes units sold per month,and P is the price of the PC.The firm's total cost is C = 40,000 + 800Q + CD,where CD denotes the firm's total cost of producing drives.Currently,CD = 100QD,that is,the firm's cost per drive is $100.
(a)If there is no external market for DVD drives,how many computers should Doorway produce and sell in order to maximize profit? What transfer price should the firm set for disk drives?
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Essay