Question 1

Average variable costs are minimized when:
A)marginal costs begin to increase.
B)marginal costs begin to decrease.
C)marginal cost is greater than average total cost.
D)marginal cost equals average variable cost.

Accepted Answer

When marginal cost equals average variable cost, it means that each additional unit of output is being produced at the same cost as the average cost of producing all existing units of output. This indicates that the firm is utilizing its variable inputs (such as labor and materials) in the most efficient way possible, resulting in minimized average variable costs.

Question 2

The effect of spreading out the fixed costs outweighing the effect of diminishing returns is illustrated by the _______ average cost curve _______.
A)long-run; decreasing
B)long-run; increasing
C)short-run; decreasing
D)short-run; increasing

Accepted Answer

The answer of The effect of spreading out the fixed...

Question 3

You observe that at your current production of rutabaga, the average total cost of producing rutabaga is $1 and the marginal cost of producing rutabaga is $2. What should always happen if you increase rutabaga production?
A)Marginal cost will fall.
B)Average total cost will rise.
C)Average total cost will fall.
D)Both A and B are correct.

Accepted Answer

When the marginal cost of producing an additional unit (in this case, $2) is higher than the current average total cost ($1), increasing production will raise the average total cost. This is because the new, higher marginal cost pulls the average cost up.

Question 4

If the marginal cost of producing the next unit of output is less than the average total cost, then:
A)the average total cost curve is increasing.
B)the marginal cost curve is at its minimum.
C)the average total cost curve is decreasing.
D)the average total cost curve is at its minimum.

Accepted Answer

If the marginal cost is less than the average total cost, it means that producing the next unit is cheaper than the average cost of all units produced so far. This will bring down the average total cost, resulting in a decreasing average total cost curve.

Question 5

Diminishing marginal returns occur only in the long run.

Accepted Answer

Diminishing marginal returns can occur in both the short run and the long run.

Question 6

When does a firmʹs average variable cost exceed the average total cost?
A)never
B)when the average variable cost is at its minimum
C)when the average fixed cost is at its minimum
D)when the average total cost equals the average fixed cost

Accepted Answer

Average variable cost can never exceed average total cost because average total cost includes average variable cost plus average fixed cost.

Question 7

Total cost of production is the sum of total variable cost and total fixed cost. If the total fixed cost alone decreases,
A)the average total cost curve shifts upward at all output levels.
B)the marginal cost curve shifts downward at all output levels.
C)the vertical distance between the average total cost curve and the average variable cost curve decreases at all output levels.
D)the average variable cost curve shifts downward at all output levels.

Accepted Answer

The vertical distance between the average total cost (ATC) curve and the average variable cost (AVC) curve represents the average fixed cost (AFC). If the total fixed cost decreases, the AFC at all levels of output decreases, thus reducing the vertical distance between the ATC and AVC curves at all output levels.

Question 8

Diminishing marginal returns occur in the short run.

Accepted Answer

This is true as diminishing marginal returns occur when an increase in one input (e.g. labor) leads to a smaller increase in output in the short run, holding all other inputs constant. It is a phenomenon that occurs due to limited resources or capacity in the short run.

Question 9

The marginal cost curve intersects the short-run average total cost curve where:
A)marginal cost is minimized in the short run.
B)average variable costs are minimized in the short run.
C)average total costs are minimized in the short run.
D)average variable costs are maximized in the short run.

Accepted Answer

The intersection of the marginal cost curve and the short-run average total cost curve occurs at the point where the average total cost is minimized in the short run. This is because the marginal cost curve represents the additional cost incurred by producing one more unit, and when it intersects the average total cost curve, it signals the point where the costs of producing each unit are at their lowest.

Question 10

Suppose that your firmʹs marginal cost of producing a pencil is 5 cents and the average cost of producing a pencil is 3 cents. If your firm is interested in minimizing average total costs, what should your firm do?
A)Increase production.
B)Decrease production.
C)Maintain production at the current level.
D)Look for ways to increase fixed costs.

Accepted Answer

Since the average cost is currently 3 cents, it means that the firm is making a profit of 2 cents per pencil (since the marginal cost is 5 cents). However, if the firm were to decrease production, the average cost would increase, but the marginal cost would remain the same. This means that the firm would still be making a profit, but with a higher average cost. Therefore, the best choice would be to decrease production to minimize average total costs.

Question 11

You observe that at your current production of lunch boxes, the average total cost of producing lunch boxes is $5 and the marginal cost of producing lunch boxes is $2. What should always happen if you increase lunch box production?
A)Marginal cost will rise.
B)Marginal cost will fall.
C)Average total cost will rise.
D)Average total cost will fall.

Accepted Answer

When the marginal cost of producing an additional unit is less than the average total cost, increasing production will decrease the average total cost. This is because the lower cost of the additional units brings down the overall average cost.

Question 12

Average total costs are minimized when:
A)marginal costs begin to increase.
B)marginal costs begin to decrease.
C)marginal cost is greater than average total cost.
D)marginal cost equals average total cost.

Accepted Answer

When marginal cost equals average total cost, it means that each additional unit produced does not increase the average cost. This indicates that the firm is operating at its most efficient level, and any further increase in production will increase the average cost. Therefore, average total costs are minimized when marginal cost equals average total cost.

Question 13

Total cost of production is the sum of total variable cost and total fixed cost. If the total fixed cost alone increases,
A)the average total cost curve shifts downward at all output levels.
B)the marginal cost curve shifts upward at all output levels.
C)the vertical distance between the average total cost curve and average variable cost curve increases at all output levels.
D)the average variable cost curve shifts upward at all output levels.

Accepted Answer

The total fixed cost does not affect the marginal cost or the average variable cost, as these costs are related to variable costs. However, an increase in total fixed cost increases the average total cost at all levels of output because the fixed cost is spread over all units produced. This leads to a greater vertical distance between the average total cost curve and the average variable cost curve at all output levels, as the average variable cost remains unchanged while the average total cost increases.

Question 14

Other things being equal, if a firmʹs marginal cost curve shifts upward at all output levels,
A)the average total cost curve remains unchanged at all output levels.
B)the average variable cost curve remains unchanged at all output levels.
C)the average fixed cost curve remains unchanged at all output levels.
D)all of the above

Accepted Answer

If the marginal cost curve shifts upward at all output levels, it means that the cost of producing one additional unit of output has increased. However, this does not necessarily mean that the average total cost or average variable cost curves will change, as these are calculated by dividing the total cost or variable cost by the quantity produced. The only curve that will remain unchanged is the average fixed cost curve, as this is calculated by dividing the fixed cost by the quantity produced, and fixed costs by definition do not change with output.

Question 15

The effect of diminishing marginal returns outweighing the effect of spreading out the fixed costs is illustrated by the _______ average cost curve _______.
A)long-run; decreasing
B)long-run; increasing
C)short-run; decreasing
D)short-run; increasing

Accepted Answer

The effect of diminishing marginal returns outweighing the effect of spreading out fixed costs is illustrated by the short-run average cost curve increasing. This is because, in the short run, there are fixed inputs, and as production increases, the benefits of spreading out fixed costs are eventually outweighed by the increasing costs of using variable inputs more intensively, leading to diminishing marginal returns.

Question 16

If the marginal cost of producing the next unit of output exceeds the average total cost, then:
A)the average total cost curve is increasing.
B)the marginal cost curve is at its minimum.
C)the average total cost curve is decreasing.
D)the average total cost curve is at its minimum.

Accepted Answer

If the marginal cost of producing the next unit of output exceeds the average total cost, then the average total cost curve is increasing. This is because the marginal cost represents the cost of producing one additional unit, which can increase the overall cost of production and drag up the average total cost.

Question 17

Other things being equal, if the average fixed cost curve shifts upward at all output levels,
A)the marginal cost curve shifts upward at all output levels.
B)the average variable cost curve shifts upward at all output levels.
C)the average total cost curve remains unchanged at all output levels.
D)the vertical distance between the average total cost curve and the average variable cost curve increases at all output levels.

Accepted Answer

The average fixed cost (AFC) is a component of the average total cost (ATC), which is the sum of the average fixed cost and the average variable cost (AVC). If the AFC increases, the ATC also increases because the AVC remains unchanged. This results in a larger vertical distance between the ATC and AVC curves at all output levels, as the increase in AFC is reflected in the ATC but does not affect the AVC.

Question 18

Suppose you know that at the current level of production average total cost equals marginal cost, then you know that it is also true that:
A)fixed costs are zero.
B)average fixed costs are increasing.
C)average total cost will decrease if production is increased.
D)average total cost is minimized at the current level of output.

Accepted Answer

When average total cost equals marginal cost, it indicates that average total cost is at its minimum point. This is because marginal cost intersects average total cost at its lowest point.

Question 19

The short-run average total cost curve is U-shaped because average fixed costs _______ and average variable costs _______ eventually as quantity produced increases.
A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease

Accepted Answer

As quantity produced increases, the fixed cost per unit decreases, causing the average fixed cost curve to decrease. However, the variable cost per unit increases due to diminishing returns, causing the average variable cost curve to increase. The combination of these two trends results in a U-shaped average total cost curve.

Question 20

Suppose that your firmʹs marginal cost of producing a pencil is 5 cents and the average cost of producing a pencil is 7 cents. If your firm is interested in minimizing average total costs, what should your firm do?
A)Increase production.
B)Decrease production.
C)Maintain production at the current level.
D)Look for ways to increase fixed costs.

Accepted Answer

When marginal cost is below average cost, increasing production will lower the average cost until it equals the marginal cost, thus minimizing average total costs.

Quiz 5: Production Technology and Cost

Average variable costs are minimized when:

The effect of spreading out the fixed costs outweighing the effect of diminishing returns is illustrated by the _ average cost curve _.

You observe that at your current production of rutabaga, the average total cost of producing rutabaga is $1 and the marginal cost of producing rutabaga is $2. What should always happen if you increase rutabaga production?

If the marginal cost of producing the next unit of output is less than the average total cost, then:

Diminishing marginal returns occur only in the long run.

When does a firmʹs average variable cost exceed the average total cost?

Total cost of production is the sum of total variable cost and total fixed cost. If the total fixed cost alone decreases,

Diminishing marginal returns occur in the short run.

The marginal cost curve intersects the short-run average total cost curve where:

Suppose that your firmʹs marginal cost of producing a pencil is 5 cents and the average cost of producing a pencil is 3 cents. If your firm is interested in minimizing average total costs, what should your firm do?

You observe that at your current production of lunch boxes, the average total cost of producing lunch boxes is $5 and the marginal cost of producing lunch boxes is $2. What should always happen if you increase lunch box production?

Average total costs are minimized when:

Total cost of production is the sum of total variable cost and total fixed cost. If the total fixed cost alone increases,

Other things being equal, if a firmʹs marginal cost curve shifts upward at all output levels,

The effect of diminishing marginal returns outweighing the effect of spreading out the fixed costs is illustrated by the _ average cost curve _.

If the marginal cost of producing the next unit of output exceeds the average total cost, then:

Other things being equal, if the average fixed cost curve shifts upward at all output levels,

Suppose you know that at the current level of production average total cost equals marginal cost, then you know that it is also true that:

The short-run average total cost curve is U-shaped because average fixed costs _ and average variable costs _ eventually as quantity produced increases.

Suppose that your firmʹs marginal cost of producing a pencil is 5 cents and the average cost of producing a pencil is 7 cents. If your firm is interested in minimizing average total costs, what should your firm do?