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```					                                       Chapter 6: The Costs of Production

Chapter 6: The Costs of Production
Multiple Choice Questions

THE PRODUCTION FUNCTION

1. Which of the following are factors of production?
A) Output in a production function.                    C) Land, labor, capital, and entrepreneurship.
B) Productivity.                                       D) All of the above.

Answer: C Type: Definition Page: 125

2. A production function:
A) Shows the cost of producing any level of output.
B) Is a technological relationship between factors of production and output.
C) Expresses the least-cost method of producing a given level of output.
D) Expresses our ability to produce various combinations of goods, using all of our resources.

Answer: B Type: Definition Page: 125

3. A production function matches a given combination of factor inputs with the:
A) Lowest average cost of producing the output.
B) Maximum-cost method for combining the inputs.
C) Least cost of producing output.
D) Maximum output that can be technologically produced from the inputs.

Answer: D Type: Definition Page: 125

4. A production function shows the:
A) Minimum amount of output that can be obtained from alternative combinations of inputs.
B) Maximum quantities of inputs required to produce a given quantity of output.
C) Maximum output we can produce with varying combinations of factor inputs.
D) Output capacity of the entire economy.

Answer: C Type: Definition Page: 125

5. Which of the following statements is true about the production function?
A) It represents maximum technical efficiency.
B) It represents the most output attainable from any combinations of factor inputs.
C) It describes the output capacity of a single firm.
D) All of the above.

Answer: D Type: Basic Understanding Page: 125

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6. Suppose we can describe the production function for the MC Shoe Co. with the equation, TP = 7L (where L
= the number of workers). Based on this information, which of the following statements is true?
A) The MC Shoe Co. will never experience economies of scale.
B) The law of diminishing returns does not apply at the MC Shoe Co.
C) Diminishing returns begin after the seventh worker.
D) The marginal physical product curve becomes negative at 7 workers.

Answer: B Type: Complex Understanding Page: 125

7. Greater labor productivity means:
A) Lower output per labor hour.                        C) Lower output per worker.
B) Higher labor cost per unit of output.               D) Higher output per worker.

Answer: D Type: Basic Understanding Page: 126

8. Productivity:
A) Increases when the value of output increases relative to the cost of inputs.
B) Decreases when the value of output increases relative to the cost of inputs.
C) Increases when the ratio of output per unit of input rises.
D) Decreases when factors of production cost more.

Answer: C Type: Definition Page: 126

9. A firm's productivity will increase if:
A) There is an increase in production by the firm.     C) The workers are given additional capital to use.
B) The firm hires more workers.                        D) The cost of resources increases.

Answer: C Type: Basic Understanding Page: 126

10. Labor productivity will increase in response to:
A) Lower wages.
B) An increase in the amount of capital per worker.
C) Higher resource costs.
D) All of the above.

Answer: B Type: Basic Understanding Page: 126

11. Technical efficiency is achieved when a firm produces:
A) At the amount indicated by the production function.
B) Below the opportunity cost for the resources it uses.
C) The minimum necessary output to cover the opportunity cost of resources.
D) All of the above.

Answer: A Type: Definition Page: 126

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12. Technical efficiency:
A) Requires getting maximum output from the resources used in production.
B) Requires covering the opportunity costs of the resources used in production.
C) Requires production beyond the production function.
D) All of the above.

Answer: A Type: Definition Page: 126

13. When a firm produces at a technically efficient output level, it is:
A) Producing the output at the minimum MC curve.
B) Using the fewest resources to produce a good or service.
C) Producing the output where the AVC curve is at a minimum.
D) Producing the best combination of goods and services.

Answer: B Type: Basic Understanding Page: 126

14. The most desired goods and services that are given up in order to get more of another good is the:
A) Average total cost. B) Variable cost. C) Marginal cost. D) Opportunity cost.

Answer: D Type: Basic Understanding Page: 126

15. Decisions which treat at least one factor of production as fixed are referred to as:
A) Long-run decisions. B) Short-run decisions. C) Efficiency decisions. D) Investment decisions.

Answer: B Type: Definition Page: 126

16. The period in which at least one input is fixed in quantity is the:
A) Long run. B) Production run. C) Short run. D) Investment decision.

Answer: C Type: Definition Page: 127

MARGINAL PRODUCTIVITY

17. Marginal physical product is:
A) Total output divided by the quantity of input.
B) Input divided by output.
C) The change in total output divided by the change in input quantity.
D) The change in productivity associated with an additional unit of input.

Answer: C Type: Definition Page: 128

18. The change in total output associated with one additional unit of input is the:
A) Opportunity cost of the output.                    C) Marginal physical product.
B) Average productivity.                              D) Marginal cost.

Answer: C Type: Definition Page: 128

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19. Marginal physical product is the:
A) Change in total input required to produce one additional unit of output.
B) Change in total output associated with one additional unit of the variable input.
C) Number of units of output obtained from all units of input employed.

Answer: B Type: Definition Page: 128

20. Which of the following is the slope of the production function with respect to an input?
A) Marginal physical product of the input.             C) Unit cost of the input.
B) Average product of the input.                      D) Input price.

Answer: A Type: Basic Understanding Page: 128

21. If a firm could hire all the workers it wanted at a zero wage (i.e. the workers are volunteers), the firm should
hire:
A) Enough workers to produce the output where diminishing returns begins.
B) Enough workers to produce the output where worker productivity is the highest.
C) Enough workers to produce where the MPP = zero.
D) All the workers that can fit into the factory.

Answer: C Type: Complex Understanding Page: 128

22. The law of diminishing returns indicates that marginal physical product of a factor declines as:
A) More output is produced with the most efficient combination of factors.
B) More of the factor is used, holding output constant.
C) More of the factor is used, holding other inputs constant.
D) All of the above.

Answer: C Type: Definition Page: 129

23. The law of diminishing returns states that beyond some point, ceteris paribus:
A) The returns on stocks and bonds diminish with higher security prices.
B) The addition to total utility diminishes as more units of a good are consumed.
C) The marginal physical product of a factor of production diminishes as more of that factor is used.
D) The output of any good increases as more of a variable input is used.

Answer: C Type: Definition Page: 129

24. The law of diminishing returns occurs with each additional unit of a variable input when:
A) Total output begins to decline.                   C) Total output begins to rise.
B) Marginal physical product becomes negative.       D) Marginal physical product begins to decline.

Answer: D Type: Definition Page: 129

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25. In the short run, the law of diminishing returns:
A) Occurs for only a few economies.
B) Can be observed in every production process.
C) Does not occur in command economies.
D) Can be overcome by using more variable inputs.

Answer: B Type: Basic Understanding Page: 129

26. The law of diminishing returns indicates that at some rate of output:
A) Total output will fall in the long run.
B) Marginal physical product will decline in the long run.
C) Marginal physical product will decline in the short run.
D) All of the above.

Answer: C Type: Basic Understanding Page: 129

27. Diminishing returns occur because of:
A) Inefficiency in the production process.
B) The use of inferior factors of production.
C) A rising ratio of variable input to fixed input.
D) Lower opportunity costs of the factors of production.

Answer: C Type: Basic Understanding Page: 129

28. Which of the following is the best explanation of why the law of diminishing returns does not apply in the
long run?
A) In the long run, firms can increase the availability of space and equipment to keep up with the increase in
variable inputs.
B) The MPP does not change in the long run.
C) In the long run, firms have more time to find better qualified workers.
D) All factors of production are fixed in the long run.

Answer: A Type: Complex Understanding Page: 129

RESOURCE COSTS

29. Profit is:
A) The difference between total cost and variable cost.
B) The difference between total revenue and total cost.
C) Earned at all points along the production function.
D) Only possible with technical efficiency.

Answer: B Type: Definition Page: 130

30. The difference between total revenue and total cost is:
A) Marginal cost. B) Average variable cost. C) Fixed cost.          D) Profit.

Answer: D Type: Definition Page: 130

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31. The most desirable rate of output for a firm is the output that:
A) Minimizes total costs.                               C) Minimizes marginal costs.
B) Maximizes total profit.                              D) Maximizes total revenue.

Answer: B Type: Basic Understanding Page: 130

32. The shape of the marginal cost curve reflects:
A) The law of diminishing returns.                        C) The law of diminishing marginal utility.
B) The competitiveness of the firm.                       D) The law of demand.

Answer: A Type: Complex Understanding Page: 130

33. Marginal cost:
A) Is the change in total output from hiring one more factor of production.
B) Is the change in total cost from producing one additional unit of output.
C) Falls when there are diminishing returns.
D) Is the change in the total cost when hiring one more factor of production.

Answer: B Type: Definition Page: 130

34. The increase in total cost associated with a 1-unit increase in production is:
A) Marginal physical product. B) Marginal cost. C) Marginal revenue.              D) Profit.

Answer: B Type: Definition Page: 130

35. Marginal cost is equal to:
A) Total cost ÷ output.                                   C) Change in total cost ÷ change in input.
B) Change in total cost ÷ change in total output.         D) Total cost ÷ input cost.

Answer: B Type: Definition Page: 131

36. If an additional unit of labor costs \$15 and has a MPP of 50 units of output, the marginal cost is:
A) \$0.30. B) \$0.50. C) \$7.50. D) \$750.00.

Answer: A Type: Analytical Page: 131

37. If an additional unit of labor costs \$20 and has a MPP of 50 units of output, the marginal cost is:
A) \$0.50. B) \$0.40. C) \$20.00. D) \$1,000.00.

Answer: B Type: Analytical Page: 131

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38. Marginal cost:
A) Increases as a direct result of diminishing returns.
B) Rises whenever marginal physical product decreases.
C) Rises in the short run because some resources are fixed.
D) All of the above.

Answer: D Type: Definition Page: 131

39. Rising marginal costs result from:
A) Rising prices of fixed inputs.                        C) Falling marginal physical product.
B) Rising prices of variable inputs.                     D) All of the above.

Answer: C Type: Basic Understanding Page: 131

40. Rising marginal costs are the result of:
A) The law of diminishing returns.
B) Decreasing MPP.
C) Adding more variable factors of production to a fixed quantity of other factors of production.
D) All of the above.

Answer: D Type: Basic Understanding Page: 131

41. Given a constant price per unit for the variable input, marginal cost will increase with greater output if:
A) Marginal physical product is declining.              C) Total variable cost is decreasing.
B) Marginal physical product is increasing.             D) Total fixed cost is increasing.

Answer: A Type: Basic Understanding Page: 131

42. Whenever diminishing returns appear with greater output:
A) Marginal cost will be rising.                    C) MPP will rise.
B) There are diseconomies of scale.                 D) All of the above.

Answer: A Type: Analytical Page: 131

DOLLAR COSTS

43. The sum of fixed cost and variable cost at any rate of output is:
A) Total variable cost. B) Total cost. C) Average total cost.          D) Average marginal cost.

Answer: B Type: Definition Page: 132

44. The market value of all resources used in producing a good or service is expressed by:
A) Total costs. B) Implicit costs. C) Fixed costs. D) Variable costs.

Answer: A Type: Basic Understanding Page: 132

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45. An increase in production in the short run always results in an increase in:
A) Average total costs. B) Marginal costs. C) Total costs. D) Average fixed costs.

Answer: C Type: Complex Understanding Page: 132

46. The amount of fixed cost is:
A) The difference between average variable cost and average total cost in the short run.
B) Total cost at an output of zero.
C) The difference between total cost and marginal cost in the long run.
D) Represented by a curve that slopes downward as output increases.

Answer: B Type: Definition Page: 132

47. In the short run, when a firm produces zero output, total cost equals:
A) Zero. B) Variable costs. C) Fixed costs. D) Marginal costs.

Answer: C Type: Basic Understanding Page: 132

48. Which of the following costs do not change when output changes in the short run?
A) Average variable costs. B) Variable costs. C) Average fixed costs. D) Fixed costs.

Answer: D Type: Basic Understanding Page: 132

49. Costs of production that do not change with the rate of output are:
A) Nonexistent. B) Variable costs. C) Fixed costs. D) Marginal costs.

Answer: C Type: Definition Page: 132

50. Which of the following costs remains constant at all levels of output?
A) Total costs. B) Variable costs. C) Fixed costs. D) Marginal costs.

Answer: C Type: Definition Page: 132

51. Which of the following is most likely a fixed cost?
A) Raw materials cost. B) Labor cost. C) Energy cost.         D) Property taxes.

Answer: D Type: Basic Understanding Page: 132

52. Which of the following would most likely be a fixed cost?
A) The cost of property insurance.
B) The cost of water used in the production process.
C) The cost of labor used in the production process.
D) The cost of electricity used in the production process.

Answer: A Type: Basic Understanding Page: 132

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53. At any given rate of output, the difference between total cost and fixed cost is:
A) Marginal cost. B) Average variable cost. C) Zero in the short run. D) Variable cost.

Answer: D Type: Definition Page: 132

54. Costs of production that change with the rate of output are:
A) Sunk costs. B) Variable costs. C) Opportunity costs.          D) Fixed costs.

Answer: B Type: Definition Page: 132

55. Changes in short-run total costs result from changes in only:
A) Variable costs. B) Fixed costs. C) Profit. D) The price elasticity of demand.

Answer: A Type: Basic Understanding Page: 132

56. Changes in marginal costs result from changes in:
A) Variable costs. B) Fixed costs. C) Profit.        D) The price elasticity of demand.

Answer: A Type: Basic Understanding Page: 132

57. In the short run, which of the following is most likely a variable cost?
A) Contractual lease payments.                          C) Property taxes.
B) Labor and raw materials costs.                       D) Interest payments on borrowed funds.

Answer: B Type: Basic Understanding Page: 132

58. In the long run, which of the following is likely to be a variable cost?
A) Factory rental.                                       C) Interest payments on borrowed funds.
B) Wage costs.                                          D) All of the above are variable costs.

Answer: D Type: Complex Understanding Page: 132

59. In the short run, when a firm produces zero output, variable cost equals:
A) Zero. B) Total cost. C) Fixed cost. D) Marginal cost.

Answer: A Type: Basic Understanding Page: 132

60. In the long run, changes in total costs are caused by changes in:
A) Fixed costs. B) Variable costs. C) Profits. D) Sunk costs.

Answer: B Type: Basic Understanding Page: 132

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61. Which of the following is true as output increases?
A) Fixed costs decline because the costs are spread over greater production.
B) Marginal costs remain fixed.
C) Variable costs rise.
D) Average total costs decline because of diminishing returns.

Answer: C Type: Basic Understanding Page: 132

62. Which of the following costs always increases when output increases by one unit?
A) Total costs. B) Average total costs. C) Marginal costs. D) Fixed costs.

Answer: A Type: Basic Understanding Page: 132

63. Which of the following is equivalent to ATC?
A) FC + VC.
B) AFC + AVC.
C) Change in output divided by change in total cost.
D) Total cost times the quantity produced.

Answer: B Type: Definition Page: 133

64. Which of the following is equivalent to ATC?
A) FC + VC.
B) FC + MC.
C) Change in total cost divided by change in output.
D) (FC + VC) ÷ Q.

Answer: D Type: Basic Understanding Page: 133

65. Which of the following contributes to the typical U-shape of the ATC curve?
A) The initial dominance of diminishing returns.
B) The eventual dominance of the rising MC curve.
C) The steady impact of a rising AFC curve.
D) All of the above.

Answer: B Type: Basic Understanding Page: 133

66. Which of the following must always be downward-sloping?
A) The marginal cost curve when it is below the average total cost curve.
B) The marginal cost curve when it is above the average total cost curve.
C) The average total cost curve when it is below the marginal cost curve.
D) The average total cost curve when it is above the marginal cost curve.

Answer: D Type: Complex Understanding Page: 134

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67. Which one of the following curves must be falling as output increases when the marginal cost is below it?
A) The average variable cost curve.                  C) The average fixed cost curve.
B) The average total cost curve.                     D) All of the above.

Answer: D Type: Basic Understanding Page: 134

68. The average fixed cost curve:
A) Is U-shaped as a result of diminishing returns.
B) Declines as long as output increases.
C) Is intersected at its minimum point by marginal cost.
D) Intersects the marginal cost curve at its minimum point.

Answer: B Type: Basic Understanding Page: 134

69. As the production rate is increased, average fixed costs:
A) Are constant. B) First fall, then rise (in a U-shaped curve).      C) Decline.   D) Increase.

Answer: C Type: Basic Understanding Page: 134

70. For which of the following costs does the average cost curve fall continuously?
A) Fixed costs. B) Variable costs. C) Total costs. D) All of the above.

Answer: A Type: Basic Understanding Page: 134

71. The average variable cost curve slopes upward with a higher rate of output in the short run because of:
A) The effect of diminishing returns.                C) Diseconomies of scale.
B) The shape of the average fixed cost curve.        D) All of the above.

Answer: A Type: Basic Understanding Page: 134

72. In the short run, average costs may rise as a firm increases the rate of production because:
A) Inflation causes the prices of resources to increase.
B) The supply curve for the product shifts.
C) Some inputs, such as plant and equipment, cannot be changed.
D) All of the above.

Answer: C Type: Basic Understanding Page: 134

73. A U-shaped average total cost curve implies:
A) First, diminishing returns, and then, increasing returns.
B) First, marginal cost below average total cost, and then marginal cost above average total cost.
C) That total costs are at a minimum at the minimum of the average cost curve.
D) A linear total cost curve.

Answer: B Type: Complex Understanding Page: 135

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74. The marginal cost curve intersects the minimum of the curve representing:
A) TC. B) ATC. C) AFC. D) All of the above.

Answer: B Type: Basic Understanding Page: 135

75. If the marginal cost curve is rising, then which of the following must be true?
A) The average total cost curve must be rising.
B) The average total cost curve must be below the marginal cost curve.
C) The average total cost curve must be above the marginal cost curve.
D) Total costs must be rising.

Answer: D Type: Basic Understanding Page: 135

76. The tendency for total costs to rise more slowly at first and then to increase more quickly results in:
A) First, diminishing returns, and then, increasing returns.
B) First, falling marginal costs, and then, rising marginal costs.
C) First, negative marginal costs, and then, positive marginal costs.
D) First, rising average costs, and then, falling average costs.

Answer: B Type: Basic Understanding Page: 135

77. When the average total cost curve is rising, then the marginal cost curve will be:
A) Below the average fixed cost curve.                 C) Above the average total cost curve.
B) Falling with greater output.                        D) Below the average total cost curve.

Answer: C Type: Basic Understanding Page: 135

78. Which of the following contributes to an upward-sloping long-run average total cost curve?
A) Long-run marginal cost above long-run average total cost law of diminishing returns.
B) Long-run marginal cost below long-run average total cost.
C) Economies of scale.
D) The law of diminishing returns.

Answer: A Type: Basic Understanding Page: 135

ECONOMIC VS. ACCOUNTING COSTS

79. Explicit costs:
A) Include only payments to labor.
B) Are the sum of actual monetary payments made for resources used to produce a good.
C) Include the market value of all resources used to produce a good.
D) Are the total value of resources used to produce a good but for which no monetary payment is actually

Answer: B Type: Definition Page: 140

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80. Implicit costs:
A) Include only payments to labor.
B) Are the sum of actual monetary payments made for resources used to produce a good.
C) Include the value of all resources used to produce a good.
D) Are the value of resources used to produce a good but for which no monetary payment is actually made.

Answer: D Type: Definition Page: 140

81. Economic cost:
A) Includes only implicit costs.
B) Is only the sum of actual monetary payments made for resources used to produce a good.
C) Includes the market value of all resources used to produce a good.
D) Is only the value of resources used to produce a good for which no monetary payment is actually made.

Answer: C Type: Definition Page: 140

82. Economic cost:
A) Includes both implicit and explicit costs.
B) Is the sum of actual monetary payments made for resources used to produce a good.
C) Includes only implicit costs.
D) Decreases as the level of production increases.

Answer: A Type: Definition Page: 140

83. The difference between the accountant's and the economist's measurement of costs equals:
A) Explicit cost.                                    C) Total revenue minus cost.
B) The opportunity cost of unpaid resources.         D) Marginal cost.

Answer: B Type: Definition Page: 140

84. Economic and accounting costs will differ whenever:
A) There is more than one factor of production.
B) The firm fails to maximize its profits.
C) Any factor of production is not paid an explicit factor payment.
D) Firms operate as proprietorships or partnerships instead of as corporations.

Answer: C Type: Basic Understanding Page: 140

85. Accounting costs and economic costs may differ because:
A) The explicit cost for at least one factor is less than the factor's opportunity cost.
B) Accounting costs include implicit costs and economic costs do not.
C) Explicit costs are positive.
D) All of the above.

Answer: A Type: Complex Understanding Page: 140

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86. Which of the following statements about the relationship between economic costs and accounting costs is
true?
A) Accounting costs are always less than or equal to economic costs.
B) Accounting costs must equal economic costs (by definition).
C) Accounting costs are always greater than economic costs.
D) Accounting costs are equal to or greater than economic costs.

Answer: A Type: Complex Understanding Page: 140

LONG-RUN COSTS

87. In economics, the long run is considered to be:
A) A variable time depending on the nature of business.
B) Six to nine months.
C) One year.
D) More than two years.

Answer: A Type: Basic Understanding Page: 140

88. The situation in which all factors of production as variable are referred to as:
A) The long run. B) The short run. C) The efficiency decision. D) Economies of scale.

Answer: A Type: Definition Page: 140

89. The period in which there are no fixed costs is the:
A) Production run. B) Long run. C) Short run.          D) Implicit run.

Answer: B Type: Definition Page: 140

90. The long-run average total cost curve is constructed from the:
A) Minimum points of the short-run marginal cost curves.
B) Minimum points of the short-run average variable cost curves.
C) Lowest average total cost for producing each level of output.
D) Minimum points of the long-run marginal cost curves.

Answer: C Type: Complex Understanding Page: 141

91. The long-run marginal cost curve:
A) Is the sum of the short-run marginal cost curves.
B) Declines as long as output increases.
C) Is intersected at its minimum point by long-run average total cost.
D) Intersects the long-run average total cost curve at its minimum point.

Answer: D Type: Basic Understanding Page: 142

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ECONOMIES OF SCALE

92. Economies of scale are reductions in average:
A) Total cost that result from declining average fixed costs.
B) Fixed cost that result from reducing the firm's scale of operations.
C) Total cost that result from using operations of larger size.
D) Fixed cost resulting from improved technology and production efficiency.

Answer: C Type: Definition Page: 143

93. If a given amount of output can be produced by several small plants or one much larger plant with identical
minimum per-unit costs, this long-run situation reflects the existence of:
A) Economies of scale.                                 C) Constant returns to scale.
B) Diseconomies of scale.                              D) Diminishing returns.

Answer: C Type: Complex Understanding Page: 143

94. When the size of a factory (and all its associated inputs) doubles and, as a result, output more than doubles:
A) The law of diminishing returns must not apply in the smaller factory.
B) Economies of scale must exist.
C) The short-run ATC curve must be declining.
D) Marginal costs must be declining.

Answer: B Type: Complex Understanding Page: 143

95. Economies of scale:
A) Exist in both the short run and the long run.
B) Explain why average variable and average total costs decline in the short run.
C) Explain why average total costs decline as output increases in the long run.
D) Explain why average total costs increase as output increases in the long run.

Answer: C Type: Definition Page: 143

96. Economies of scale are reductions in:
A) Average total costs that result from declining average fixed costs.
B) Fixed costs that result from reducing the firm's scale of operations.
C) Marginal costs resulting from improved technology and production efficiency.
D) Minimum average total costs that result from using operations of larger size.

Answer: D Type: Definition Page: 143

97. Diseconomies of scale are reflected in:
A) The downward-sloping segment of the long-run average total cost curve.
B) The downward-sloping segment of the long-run marginal cost curve.
C) A downward shift of the long-run average total cost curve.
D) The upward-sloping segment of the long-run average total cost curve.

Answer: D Type: Complex Understanding Page: 143

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98. Diseconomies of scale are reflected in:
A) The rising segment of the long-run average total cost curve.
B) The rising segment of the short-run marginal cost curve.
C) Greater efficiency that results from specialization.
D) Downward shifts of the average total cost curve.

Answer: A Type: Complex Understanding Page: 144

99. Which of the following is a long-run concept?
A) Diminishing marginal productivity.                   C) Diseconomies of scale.
B) Diminishing returns.                                 D) All of the above.

Answer: C Type: Analytical Page: 144

THE ECONOMY TOMORROW

100. "Unit labor cost" is the same thing as:
A) The wage rate.
B) The wage rate ÷ MPP.
C) The change in labor cost divided by the change in output.
D) MC.

Answer: B Type: Definition Page: 145

101. When the wage rate is \$7 per hour and the MPP of a worker is 35 units per hour, the unit labor cost is:
A) \$0.20 per unit. B) \$7.00 per hour. C) \$245 per unit. D) \$245 per hour.

Answer: A Type: Analytical Page: 145

102. Which of the following will increase productivity?
A) Technological advances.                              C) Increased labor skills.
B) Increased managerial capabilities.                   D) All of the above.

Answer: D Type: Basic Understanding Page: 145

103. Which of the following would cause a firm's production function to shift upward?
A) An increase in production by the firm.            C) Increased training for the firm's workers.
B) Hiring more workers.                              D) An increase in factor costs.

Answer: C Type: Basic Understanding Page: 145

104. Assuming labor is a variable input, an increase in labor productivity would result in:
A) An upward shift in the MPP curve.                   C) A downward shift in the ATC curve.
B) A downward shift in the MC curve.                   D) All of the above.

Answer: D Type: Complex Understanding Page: 145

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105. Technological changes that increase productivity shift the:
A) Production function downward.
B) Average total cost curve downward.
C) Marginal cost curve upward as output increases.
D) All of the above.

Answer: B Type: Complex Understanding Page: 145

106. Higher education levels and better management should:
A) Cause MPP to slope downward.
B) Shift the long-run average total cost curve downward.
C) Lead to greater diseconomies of scale.
D) All of the above.

Answer: B Type: Analytical Page: 145

107. When the production function shifts upward:
A) MC shifts downward. B) AVC shifts downward.            C) ATC shifts downward.      D) All of the above.

Answer: D Type: Basic Understanding Page: 145

108. When the production function shifts downward the:
A) MC shifts upward. B) AVC shifts downward.            C) ATC shifts downward.      D) All of the above.

Answer: A Type: Basic Understanding Page: 145

109. The creation of the World Wide Web has:
A) Reduced information costs.                           C) Increased productivity.
B) Reduced transaction costs.                           D) All of the above.

Answer: D Type: Basic Understanding Page: 147

Use the following to answer questions 110-116:

Table 6.1

Units of labor    Units of output
0                   0
1                 15
2                 35
3                 45
4                 52

Page 17
Chapter 6: The Costs of Production

110. What is the marginal physical product of the first unit of labor in Table 6.1?
A) 0. B) 35. C) 17. D) 15.

Answer: D Type: Analytical Page: 128

111. What is the marginal physical product of the second unit of labor in Table 6.1?
A) 20. B) 17. C) 35. D) 5.

Answer: A Type: Analytical Page: 128

112. With which unit of labor do diminishing marginal returns first appear in Table 6.1?
A) The first. B) The second. C) The third. D) The fourth.

Answer: C Type: Analytical Page: 148

113. At what output level in Table 6.1 is labor productivity the highest?
A) 1. B) 2. C) 3. D) 4.

Answer: B Type: Basic Understanding Page: 148

114. If a fifth unit of labor was added to Table 6.1, its MPP would most likely be:
A) Zero. B) 7. C) Less than 7. D) Greater than 7.

Answer: C Type: Basic Understanding Page: 148

115. What is the labor cost per unit of output in Table 6.1 when output is increased from 15 to 35 units of output?
A) 20 units of labor. B) 0.43 units of labor. C) 0.05 units of labor. D) 1 unit of labor.

Answer: C Type: Analytical Page: 148

116. What is the labor cost per unit of output in Table 6.1 when output is increased from 35 to 45 units of output?
A) 10 units of labor. B) 0.78 units of labor. C) 0.10 units of labor. D) 1 unit of labor.

Answer: C Type: Analytical Page: 131

Use the following to answer questions 117-123:

Table 6.2

Outputs (units per day)            0     10    20    30
Total cost (dollars per day)      40     54    62    80

Page 18
Chapter 6: The Costs of Production

117. Average fixed cost at 20 units of output in Table 6.2 is:
A) \$1.00. B) \$2.00. C) \$2.50. D) \$4.00.

Answer: B Type: Analytical Page: 135

118. The marginal cost between 20 and 30 units of output in Table 6.2 is:
A) \$1.60. B) \$4.00. C) \$1.80. D) \$18.00.

Answer: C Type: Analytical Page: 136

119. Above 10 units of output, the average fixed cost in Table 6.2:
A) Rises above \$2.00. B) Remains constant. C) Stays below \$0.50.             D) Continues to decline.

Answer: D Type: Analytical Page: 134

120. At 20 units of output in Table 6.2 the average variable cost is:
A) \$1.10 per unit. B) \$1.75 per unit. C) \$2.00 per unit. D) \$3.10 per unit.

Answer: A Type: Analytical Page: 135

121. For the output levels in Table 6.2, the minimum of the average variable cost curve occurs at a production rate
of:
A) Zero units per day. B) 10 units per day. C) 20 units per day. D) 30 units per day.

Answer: C Type: Analytical Page: 135

122. At 10 units of output in Table 6.2, the total fixed costs are:
A) \$44. B) \$14. C) \$40. D) \$54.

Answer: C Type: Analytical Page: 132

123. At 30 units of output in Table 6.2, the total variable costs are:
A) \$30. B) \$40. C) \$50. D) \$80.

Answer: B Type: Analytical Page: 132

Use the following to answer questions 124-129:

Complete Table 6.3. Then use the information in the table to answer the indicated questions.

Table 6.3

Q     TFC      TVC        TC      AVC       MC
0     ____     ____       15
1     ____     ____       23      ____      ____
2     ____     ____      ____     ____        4
3     ____      15       ____     ____      ____

Page 19
Chapter 6: The Costs of Production

124. Total fixed costs in Table 6.3 are equal to:
A) \$0 because the problem involves the long run.        B) \$15. C) \$30.   D) \$60.

Answer: B Type: Analytical Page: 132

125. The marginal cost of the first unit of output in Table 6.3 is:
A) \$3. B) \$4. C) \$8. D) \$15.

Answer: C Type: Analytical Page: 136

126. The total cost of 2 units of output in Table 6.3 is:
A) \$15. B) \$27. C) \$23. D) \$65.

Answer: B Type: Analytical Page: 132

127. The total variable cost of 1 units of output in Table 6.3 is:
A) \$15. B) \$12. C) \$30. D) \$8.

Answer: D Type: Analytical Page: 132

128. The marginal cost of the third unit of output in Table 6.3 is:
A) \$3. B) \$4. C) \$8. D) \$15.

Answer: A Type: Analytical Page: 136

129. The average variable cost of the second unit of output in Table 6.3 is:
A) \$15. B) \$5. C) \$8. D) \$6.

Answer: D Type: Analytical Page: 134

Page 20
Chapter 6: The Costs of Production

Use the following to answer questions 130-133:

Figure 6.1

130. The marginal physical product of the third unit of labor in Figure 6.1 is:
A) 2.0. B) 6.0. C) 6.67. D) 20.0.

Answer: B Type: Analytical Page: 128

131. The marginal physical product of the fifth unit of labor in Figure 6.1 is:
A) 1. B) 5. C) 20. D) 25.

Answer: A Type: Analytical Page: 128

132. The marginal physical product of labor in Figure 6.1 is negative for the:
A) Third worker. B) Fourth worker. C) Fifth worker. D) Sixth worker.

Answer: D Type: Analytical Page: 128

133. In Figure 6.1 diminishing marginal returns first occur with the:
A) Fifth worker. B) Fourth worker. C) Third worker. D) Second worker.

Answer: C Type: Analytical Page: 129

Page 21
Chapter 6: The Costs of Production

Use the following to answer questions 134-137:

Figure 6.2

d
10                 c            e
b                          f
8
g
MPP
6

4     a
h
2                                                            i
j
1   2    3     4     5     6       7       8       9   10
Labor Input (workers per period)

134. In Figure 6.2, if 3 units of labor are used, marginal costs are:
A) Increasing. B) Decreasing. C) Zero. D) Negative.

Answer: B Type: Analytical Page: 131

135. In Figure 6.2, if 5 units of labor are used, marginal costs are:
A) Increasing. B) Constant. C) Decreasing. D) Zero.

Answer: A Type: Analytical Page: 131

136. In Figure 6.2, at which level of labor input is marginal cost minimized?
A) 1. B) 4. C) 9. D) 10.

Answer: B Type: Analytical Page: 131

137. In Figure 6.2, if 6 units of labor are used, marginal costs are:
A) Increasing. B) Constant. C) Decreasing. D) Zero.

Answer: A Type: Analytical Page: 131

Page 22
Chapter 6: The Costs of Production

Use the following to answer question 138:

Figure 6.3

• • •
c       d
MARGINAL PHYSICAL PRODUCT

e
5

4
b
•                        •
f

•
g
3                                                    MPP

2    •
a

•
h

•
1                                                                  i

•    j

•
0     1     2      3      4     5    6       7       8          9       10       11
k
LABOR INPUT

138. Refer to Figure 6.3. Maximum production occurs at a level of labor input equal to:
A) 2 workers. B) 4 workers. C) 8 workers. D) 10 workers.

Answer: D Type: Complex Understanding Page: 127

Use the following to answer questions 139-143:

Figure 6.4

Page 23
Chapter 6: The Costs of Production

139. What is the marginal cost of the 120th unit of output in Figure 6.4?
A) \$25. B) \$100. C) \$104. D) \$144.

Answer: D Type: Analytical Page: 134

140. What is the total fixed cost in Figure 6.4?
A) \$48. B) \$10,000. C) \$4,800. D) \$14,800.

Answer: C Type: Analytical Page: 134

141. What is the total cost of 120 units in Figure 6.4?
A) \$10,000. B) \$14,800. C) \$17,280. D) \$17,760.

Answer: C Type: Analytical Page: 134

142. What is the average fixed cost when output is 120 units in Figure 6.4?
A) \$10. B) \$40. C) \$48. D) \$4,800.

Answer: B Type: Analytical Page: 134

143. What is the total variable cost when output is 100 units in Figure 6.4?
A) \$12,480. B) \$104. C) \$100. D) \$12,000.

Answer: A Type: Analytical Page: 134

Use the following to answer questions 144-148:

Figure 6.5

MC
PRODUCTION COSTS (\$)

ATC
AVC

AFC

0     Q1    Q Q           Q4
2 3
OUTPUT

Page 24
Chapter 6: The Costs of Production

144. Refer to Figure 6.5. Diminishing returns begin at an output of:
A) Q1. B) Q2. C) Q3. D) Q4.

Answer: A Type: Complex Understanding Page: 130

145. Refer to Figure 6.5. The vertical distance between the AVC and the ATC curves represents:
A) Marginal costs.                                     C) Average fixed costs.
B) Total fixed costs.                                  D) The increasing efficiency of workers.

Answer: C Type: Complex Understanding Page: 134

146. Refer to Figure 6.5. The vertical distance between the ATC and AVC curves multiplied by the number of units
produced equals:
A) Marginal costs. B) Total fixed costs. C) Total variable cost. D) Total cost.

Answer: B Type: Analytical Page: 134

147. Refer to Figure 6.5 at an output of Q4. The ATC at Q4 multiplied times Q4 equals:
A) Marginal costs. B) Total profit. C) Total revenue. D) Total cost.

Answer: D Type: Analytical Page: 134

148. In Figure 6.5, at what output does this firm maximize technical efficiency?
A) Q1. B) Q2. C) Q3. D) Q4.

Answer: D Type: Analytical Page: 126

Use the following to answer questions 149-150:

Figure 6.6

Total Cost
PRODUCTION COSTS (\$)

Total Fixed Cost

0       10      20       30      40        50
OUTPUT

Page 25
Chapter 6: The Costs of Production

149. Refer to Figure 6.6. The vertical difference between the total cost curve and the total fixed cost curve
represents:
A) Total variable costs.                               C) Average fixed costs.
B) Total marginal costs.                               D) Average variable costs.

Answer: A Type: Complex Understanding Page: 133

150. Refer to Figure 6.6. The best estimate of where diminishing returns begins is at an output of:
A) 10. B) 20. C) 30. D) 40.

Answer: B Type: Complex Understanding Page: 133

Use the following to answer questions 151-153:

Figure 6.7
Long-run average total cost curve

151. In Figure 6.7, a firm that produces over 400 units of output should choose a plant with which short-run
average total cost function?
A) ATC1. B) ATC2. C) ATC3. D) Either ATC2 or ATC3.

Answer: C Type: Basic Understanding Page: 141

152. In Figure 6.7, diseconomies of scale occur at output rates:
A) Up to 200 units per period.                         C) Between 400 and 500 units per period.
B) Between 200 and 300 units per period.               D) Greater than 500 units per period.

Answer: D Type: Basic Understanding Page: 141

Page 26
Chapter 6: The Costs of Production

153. In Figure 6.7, the long-run average total cost curve is given by the curved line segment:
A) ACE. B) ABFDGE. C) ABF only. D) BFD.

Answer: B Type: Basic Understanding Page: 141

Use the following to answer questions 154-155:

Figure 6.8
AVERAGE COSTS (\$)

#1
#2            #3            #5
#4

0
OUTPUT

154. Refer to Figure 6.8. Economies of scale occur in the following range of factory sizes:
A) #1 to #2. B) #1 to #3. C) #3 only. D) All of the factories exhibit economies of scale.

Answer: B Type: Complex Understanding Page: 143

155. Refer to Figure 6.8. Diseconomies of scale begin:
A) At the minimum points on all five ATC curves.
B) After the third factory.
C) After the fifth factory.
D) None of the factories exhibit diseconomies of scale.

Answer: B Type: Complex Understanding Page: 143

The following multiple-choice questions require critical thinking about In the News and World View articles that
appeared in the text.

156. An In the News article talks about a joint venture between General Motors and Isuzu to build a new factory
outside Dayton, Ohio. Which of the following statements is true about the costs of this factory?
A) In the planning stage, all construction costs are variable.
B) Once the factory is built, there are fixed costs.
C) Once the factory is built, the ATC and AVC curves are separate.
D) All of the above.

Answer: D Type: Basic Understanding Page: 141

Page 27
Chapter 6: The Costs of Production

157. One In the News article reports profit for a Houston-based funeral giant is 31 cents on every dollar vs. a profit
of 12 cents for the funeral industry in general. Such profits are most likely the result of:
B) Economies of scale.                                  D) A downward shift in the production function.

Answer: B Type: Complex Understanding Page: 143

158. One In the News article reports profit for a Houston-based funeral giant is 31 cents on every dollar vs. a profit
of 12 cents for the funeral industry in general. Such profits are most likely the result of:
A) Economies of scale.
B) Reductions in minimum average costs because of size.
C) A lower ATC curve.
D) All of the above.

Answer: D Type: Complex Understanding Page: 143

159. One World View article titled "United States Gains Cost Advantage." During the 1990s, unit labor costs in
the United States declined:
A) And the U.S. was less competitive in world markets.
B) Because productivity advances were small and wage increases were high.
C) Because productivity advances were greater than wage increases.
D) And cost curves shifted upward.

Answer: C Type: Complex Understanding Page: 146

160. An In the News article has the headline "United States Gains Cost Advantage." One reason for the increase in
global competitiveness could be:
A) The law of demand.                                  C) Disconomies of scale.
B) The law of diminishing returns.                     D) Lower unit labor costs.

Answer: D Type: Complex Understanding Page: 146

161. An In the News article says productivity advances have contributed to U.S. competitiveness in world markets.
When improvements in productivity reduce costs the production function shifts:
A) Upward and cost curves shift upward.               C) Downward and cost curves shift upward.
B) Upward and cost curves shift downward.             D) Downward and cost curves shift downward.

Answer: B Type: Complex Understanding Page: 146

True/False Questions

THE PRODUCTION FUNCTION

T     F 162. The production function shows the maximum amount of a particular good or service that can be
produced with given combinations of resources.

Answer: True Type: Basic Understanding Page: 125

Page 28
Chapter 6: The Costs of Production

T   F 163. The production function shows the minimum output that would equal the opportunity cost of the
resources used to produce the output.

Answer: False Type: Basic Understanding Page: 125

T   F 164. The productivity of any input is independent and is not affected by the other resources that are used.

Answer: False Type: Basic Understanding Page: 125

T   F 165. When a firm is able to achieve the output indicated by a production function, it is producing with
technical efficiency.

Answer: True Type: Basic Understanding Page: 126

T   F 166. Short-run choices imply that at least one factor of production is fixed.

Answer: True Type: Basic Understanding Page: 127

MARGINAL PRODUCTIVITY

T   F 167. Total output may continue to rise even though marginal physical product is declining.

Answer: True Type: Basic Understanding Page: 128

T   F 168. Total output may continue to rise even though marginal physical product is negative.

Answer: False Type: Basic Understanding Page: 128

T   F 169. The marginal physical product of a variable input eventually declines as more of it is employed with
a given quantity of other (fixed) inputs.

Answer: True Type: Basic Understanding Page: 128

T   F 170. The law of diminishing returns indicates that the marginal physical product of a variable input
declines as more of it is employed, ceteris paribus.

Answer: True Type: Basic Understanding Page: 129

T   F 171. The law of diminishing returns is reflected in the downward sloping portion of the short-run
marginal cost curve.

Answer: False Type: Basic Understanding Page: 129

Page 29
Chapter 6: The Costs of Production

RESOURCE COSTS

T   F 172. The difference between total revenue and total cost is profit.

Answer: True Type: Basic Understanding Page: 130

T   F 173. Marginal cost always reflects the cost of variable factors.

Answer: True Type: Basic Understanding Page: 130

T   F 174. Whenever MPP is increasing with output, the marginal cost of producing a good must be falling.

Answer: True Type: Basic Understanding Page: 130

T   F 175. If MPP declines with greater output, then MC must increase.

Answer: True Type: Basic Understanding Page: 130

DOLLAR COSTS

T   F 176. Total cost refers to the market value of all resources used in producing a good or service.

Answer: True Type: Basic Understanding Page: 132

T   F 177. The total cost at a zero level of output is always equal to the variable cost.

Answer: False Type: Basic Understanding Page: 132

T   F 178. ATC = AFC + AVC.

Answer: True Type: Basic Understanding Page: 134

T   F 179. When marginal cost is below average total cost, average variable cost will always fall.

Answer: False Type: Basic Understanding Page: 134

T   F 180. When the marginal cost curve is below the average total cost curve, the average total cost curve must
be falling.

Answer: True Type: Basic Understanding Page: 134

T   F 181. The marginal cost curve intersects the minimum of the average total cost curve and also the

Page 30
Chapter 6: The Costs of Production

minimum of the average variable cost curve.

Answer: True Type: Basic Understanding Page: 134

ECONOMIC VS. ACCOUNTING COSTS

T   F 182. The difference between the accountant's and the economist's measurement of cost equals implicit
costs.

Answer: True Type: Basic Understanding Page: 140

T   F 183. Economic and accounting costs will diverge whenever any factor of production is not paid an
explicit wage.

Answer: True Type: Basic Understanding Page: 140

T   F 184. Accounting costs and economic costs differ by the amount of explicit costs.

Answer: False Type: Basic Understanding Page: 140

LONG-RUN COSTS

T   F 185. Long-run choices imply that all factors must be variable.

Answer: True Type: Basic Understanding Page: 140

T   F 186. There are still some fixed costs in the long run, such as rent.

Answer: False Type: Basic Understanding Page: 140

T   F 187. The long-run cost curve is simply a summary of the best short-run fixed cost curves.

Answer: False Type: Basic Understanding Page: 142

ECONOMIES OF SCALE

T   F 188. If a larger plant reduces minimum average costs, there are economies of scale.

Answer: True Type: Basic Understanding Page: 143

Page 31
Chapter 6: The Costs of Production

T   F 189. If a firm has constant returns to scale, the long-run cost curve will be downward sloping.

Answer: False Type: Basic Understanding Page: 144

T   F 190. Diseconomies of scale imply that the average total cost curve is downward-sloping in the long run.

Answer: False Type: Basic Understanding Page: 144

THE ECONOMY TOMORROW

T   F 191. More education and better technology contribute to an increase in productivity, ceteris paribus.

Answer: True Type: Basic Understanding Page: 145

T   F 192. Unit labor cost represents the increase in output because of an additional worker is hired.

Answer: False Type: Basic Understanding Page: 145

T   F 193. Better management shifts the production function downward and the total cost curve upward.

Answer: False Type: Basic Understanding Page: 145

Page 32
Chapter 6: The Costs of Production

Q    TFC    TVC    TC   AVC     MC
0     15      0    15
1     15      8    23    8       8
2     15     12    27    6       4
3     15     15    30    7.5     3

Page 33

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