Question 1

The law of diminishing returns states that if increasing quantities of a variable factor are applied to a given quantity of fixed factors, then

Accepted Answer

The law of diminishing returns implies that as more units of a variable factor are added to fixed factors, the marginal product (MP) of the variable factor will eventually decrease, and subsequently, the average product (AP) will also decrease.

Question 2

Churches, the YMCA, the Salvation Army, and the Nature Conservancy are examples of

Accepted Answer

Non-profit organizations are typically set up for charitable or community purposes and do not operate for the purpose of making a profit. Churches, the YMCA, the Salvation Army, and the Nature Conservancy are all examples of non-profit organizations.

Question 3

A firm can raise financial capital without incurring debt by issuing new shares and/or

Accepted Answer

Reinvesting profits allows a firm to use its own earnings to finance its operations or growth, avoiding the need to incur debt.

Question 4

The period of time over which all factors of production and technology are variable is known as the

Accepted Answer

The answer of The period of time over which all...

Question 5

An example of debt financing for any form of business organization is

Accepted Answer

Borrowing from a bank is an example of debt financing, where a business borrows money and pays it back with interest over a set period of time. Buying back bonds (A) and buying back previously issued stock (D) are examples of equity financing, where a company uses its own funds to repurchase its own debt or shares. Issuing new stock (C) is also equity financing, where a company raises funds by selling ownership shares to investors. Using undistributed profits (E) is a form of retained earnings, where a company reinvests its profits rather than distributing them to shareholders or using them to finance debt.

Question 6

The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. $\begin{array}{|l|l|}
\hline\begin{array}{l}
\text { Labour per unit of } \
\text { time }
\end{array}&\text { Total Output }\\hline 0 & 0 \
\hline 1 & 25 \
\hline 2 & 75 \
\hline 3 & 175 \
\hline 4 & 250 \
\hline 5 & 305 \
\hline
\end{array}$
$\text { TABLE 7- } 4$
-Refer to Table 7- 4. The total variable cost of producing 305 units of output is

Accepted Answer

The answer of The following data show the total output...

Question 7

Consider a firm in the short run. If total product is at its maximum, then

Accepted Answer

When total product is at its maximum, marginal product is zero because any additional input does not increase output.

Question 8

The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume that the wage per unit of labour is $10 and the cost of the capital is $50. $$\begin{array}{l}
\begin{array} { | l | l | } 
\hline \text { Labour per period } & \text { Total Output per period } \
\hline 0 & 0 \
\hline 1 & 10 \
\hline 2 & 30 \
\hline 3 & 90 \
\hline 4 & 132 \
\hline 5 & 150 \
\hline
\end{array}\
\text { TABLE 7- } 3
\end{array}$$
-Refer to Table 7- 3. If this firm is producing 20 units of output per period its marginal cost is

Accepted Answer

The answer of The following data show the total output...

Question 9

Suppose a production function for a firm takes the following algebraic form: Q = 2KL - (0.2)L2, where Q is the output of sweaters per day. Now suppose the firm is operating with 8 units of capital (K=8) and 10 units of labour (L=10). What is the output of sweaters?

Accepted Answer

Substituting K=8 and L=10 into the production function, we get:
Q = 2(8)(10) - (0.2)(10)^2
Q = 160 - 20 
Q = 140 sweaters per day

Question 10

The diagram below shows some short- run cost curves for a firm.  FIGURE 7- 2
-Refer to Figure 7- 2. Which of the following choices correctly identifies the cost curves in part (ii) of the figure?

Accepted Answer

Curve 5 is the ATC curve because it is the U-shaped curve that passes through the lowest points of the AVC and AFC curves.

Curve 4 is the MC curve because it intersects the ATC and AVC curves at their respective minimum points.

Curve 6 is the AVC curve because it is the U-shaped curve that lies entirely above the AFC curve.

Curve 7 is the AFC curve because it continuously decreases as output increases, approaching zero as output approaches infinity.

Question 11

Consider a firm in the short run. When the total- product curve is increasing at an increasing rate

Accepted Answer

When the total-product curve is increasing at an increasing rate, that means the marginal product is positive and increasing. This is because the additional unit of input is adding more to the total output than the previous unit. The average product may or may not be increasing depending on how much the marginal product is adding to the current average. However, it cannot be falling as stated in option B. Option A is partially correct as marginal product is positive but it is not declining. Option C is incorrect as the marginal-product curve lies above the average-product curve when the total-product curve is increasing at an increasing rate. Option E is incorrect as average product is not zero.

Question 12

The choices listed below involve costs to the firm. For which is the implicit cost potentially different than its explicit cost?

Accepted Answer

Implicit costs refer to the opportunity costs of using resources owned by the firm, such as firm-owned assets, which do not involve direct monetary payment. This is different from explicit costs, which involve direct monetary payments, such as renting land or hiring workers.

Question 13

The table below provides the annual revenues and costs for a family- owned firm producing catered meals. $\begin{array}{|l|l|}
\hline \text { Total Revenues }(\$) & 500,000 \
\hline & \
\hline \text { Total Costs (\$) } & \
\hline \text { wages and salaries } & 200,000 \\hline \text { risk- free return of } 6 \% \text { on owners' capital of } 250,000 & 15,000 \
\hline \text { rent } & 105,000 \
\hline \text { - depreciation of capital equipment } & 25,000 \
\hline \text { risk premium of } 8 \% \text { on owners' capital of } 250,000 & 20,000 \
\hline \text { - intermediate inputs } & 150,000 \
\hline \text { forgone wages of owners in alternative employment } & 80,000 \
\hline \text { interest on bank loan } & 10,000 \
\hline
\end{array}$
$\text { TABLE 7- } 1$
-Refer to Table 7- 1. The explicit costs for this family- owned firm are

Accepted Answer

Explicit costs are those that require an outlay of money. In this case, the explicit costs are wages and salaries, rent, depreciation of capital equipment, intermediate inputs, interest on bank loan, and forgone wages of owners in alternative employment. These costs total $490,000.

Question 14

Suppose a firm is producing 500 units of output, incurring a total cost of $700 000 and total fixed cost of $100 000. It can be concluded that average variable cost is

Accepted Answer

Average variable cost is total variable cost divided by the number of units produced. In this case, total variable cost is $700,000 - $100,000 = $600,000. So, average variable cost is $600,000 / 500 = $1200.

Question 15

When a corporation issues a bond

Accepted Answer

When a corporation issues a bond, it is making a promise to pay interest each year and to repay the principal at a stated time in the future. This is known as debt capital, as opposed to equity capital (which involves issuing stock and giving ownership rights to shareholders). The purchaser of a bond does not assume ownership rights, but rather becomes a creditor of the corporation.

Question 16

Consider a house- construction firm with fixed capital. The firm can build 8 houses per year with 16 workers and 8.8 houses per year with 17 workers. If it is currently building 8.8 houses per year, which of the following is true?

Accepted Answer

The firm is currently building 8.8 houses per year with 17 workers, which is more than the 8 houses per year that it can build with 16 workers. This means that the firm has not yet reached the point of diminishing marginal productivity, where the additional output produced by each additional worker decreases.

Question 17

Average, marginal, and total product curves

Accepted Answer

The average, marginal, and total product curves show the relationships between physical inputs (such as labor) and physical outputs (such as the quantity of goods produced). They do not relate to prices of inputs or products, and while they do demonstrate increases in output as more inputs are applied, this does not necessarily relate to the price of the output or quantity supplied. The concept of all inputs being variable is related to the short-run vs. long-run distinction, and is not directly related to the product curves themselves.

Question 18

A firm that maximizes its profits by producing a certain level of output must also

Accepted Answer

In order to maximize profits, a firm must produce the level of output where marginal revenue equals marginal cost. This level of output also happens to be the point where the firm's cost of producing that output is minimized. Therefore, choice A is the correct answer. Choices B, C, D, and E do not necessarily lead to profit maximization in and of themselves.

Question 19

FIGURE 7- 1
-Refer to Figure 7- 1. Total product is increasing at an increasing rate

Accepted Answer

Total product is increasing at an increasing rate from 0 to 140 units of output, as the slope of the total product curve is increasing in this range. After 140 units, the slope begins to decrease, indicating a decreasing rate of increase in total product.

Question 20

In the short run, if average total cost is increasing as output rises, then

Accepted Answer

If average total cost is increasing as output rises, it means that the cost of producing each additional unit is rising. This suggests that the firm may be experiencing diminishing marginal returns to its inputs. Hence, average variable cost (the variable cost per unit) must be increasing as the firm is likely hiring more variable inputs such as labor to produce additional units.

Quiz 7: Producers in the Short Run