Question 1

Two small airlines provide shuttle service between Las Vega & Reno. The services are alike in every respect except that Fly Right bought its airplane for $500,000, while Fly by Night rents its plane for $30,000 a year. If Fly Right were to go out of business, it would be able to rent its plane to another airline for $30,000. Which airline has the lower costs?

Accepted Answer

Neither, the costs are identical.

Question 2

In 1985, Alice paid $20,000 for an option to purchase ten acres of land. By paying the $20,000, she bought the right to buy land for $100,000 in 1992. When she acquired the option in 1985, the land was worth $120,000. In 1992, it is worth $110,000. Should Alice exercise the option and pay $100,000 for the land.

Accepted Answer

Yes.

Question 3

Farmer Jones bought his farm for $75,000 in 1975. Today the farm is worth $500,000 and the interest rate is 10%. ABC Corporation has offered to buy the farm today for $500,000 and XYZ Corporation has offered to buy the farm for $530,000 one year from now. Farmer Jones could earn net profit of $15,000 (over and above all his expenses) if he farms the land this year. What should he do?

Accepted Answer

Sell to ABC Corp

Question 4

Which of the following statements is true regarding the differences between economic and accounting costs?

Accepted Answer

Accounting costs include only explicit costs.

Question 5

Constantine purchases 100 shares of IBM stock several years ago for $150 per share. The price of these shares has fallen to $55 per share. Constantine\'s investment strategy is \"buy low, sell high.\" Therefore, he will not sell his IBM stock until the price rises above $150 per share. If he sells at a price lower than $150 per share, he will have \"bought high & sold low\". Constantine\'s decision:

Accepted Answer

is in correct because the original price paid for the shares is a sunk cost and should have no bearing on whether the shares should be held of sold.

Question 6

In order for a taxicab to be operated in New York City, it must have a medallion on its hood. Medallions are expensive, but can be resold, and therefore are an example of:

Accepted Answer

a fixed cost

Question 7

Prospective sunk costs

Accepted Answer

are relevant to economic decision-making

Question 8

Which of the following statements demonstrates an understanding of the importance of sunk costs for decision making?   I. \"Even though I hate my MBA classes, I can\'t quit because I\'ve spent so much money on tuition\".  II. \"To break into the market for soap, our firm needs to spend $10 million on creating an image that is unique to our new product. When deciding whether to develop the new soap, we need to take this marketing cost into account.\"

Accepted Answer

II only

Question 9

The difference between the economic & accounting costs of a firm are

Accepted Answer

The opportunity costs of the factors of production that the firm owns.

Question 10

Consider the following statements:   I. Increases in the rate of income tax decrease the opportunity cost of attending college.  II. The introduction of distance learning, which enables students to watch lectures at home, decreases the opportunity cost of attending college\".

Accepted Answer

Both are true

Question 11

Which of the following statements uses the concept of opportunity costs in decision making?   I. \"Because my secretary\'s time has already been paid for, my cost of taking on an additional project is lower than it otherwise would be.\"  II. \"Since NASA is running under budget this year, the cost of another space shuttle launch is lower than it otherwise would be.\"

Accepted Answer

BOTH FALSE.

Question 12

Fixed costs are fixed with respect to changes in

Accepted Answer

Output

Question 13

Incremental cost is the same concept as _____ cost

Accepted Answer

Marginal

Question 14

Which of the following costs always declines as output increases?

Accepted Answer

Average fixed cost

Question 15

The total cost (TC) of producing software diskettes (Q) is given as: TC = 200 + 5Q. What is the variable cost?

Accepted Answer

5Q

Question 16

The total cost (TC) of producing computer software diskettes (Q) is given as TC = 200 + 5Q. What is the fixed cost?

Accepted Answer

200

Question 17

The total cost (TC) of producing computer software diskettes (Q) is given as TC = 200 + 5Q. What is the marginal cost?

Accepted Answer

5

Question 18

The total cost (TC) of producing computer software diskettes (Q) is given as TC = 200 + 5Q. What is the average total cost?

Accepted Answer

5 + (200/Q)

Question 19

The total cost (TC) of producing computer software diskettes (Q) is given as TC = 200 + 5Q. What is the average fixed cost?

Accepted Answer

A) 500  B) 5Q  C) 5  D) 5 + (200/Q)   E) none of the above  NONE OF THE ABOVE

Question 20

Carolyn knows average total cost and average variable cost for a given level of output. Which of the following costs can she not determine given this information?

Accepted Answer

Carolyn can determine all of the above costs given the information provided.

Question 21

The average total cost to produce 100 cookies is $0.25 per cookie. The marginal cost is constant at $0.10 for all cookies produced.

Accepted Answer

The total cost to produce 100 cookies is:   $25.00    Total cost to produce 50 cookies:  $20    For 100 cookies, the average total cost is: FALLING    Which piece of information would not be helping in calculating the marginal cost of the 75th unit of output? The firm\'s fixed cost

Question 22

Jim left his previous job as a sales manager and started his own sales consulting business. He previously earned $70,000 per year, but no he pays himself $25,000 per year while he is building the new business. What is the economic cost of the time he contributes to the new business?

Accepted Answer

$45,000 per year  70,000 - 25,000

Question 23

We typically think of labor as a variable cost, even in the very short run. However, some labor cost may be fixed. Which of the following items represents an example of a fixed labor cost?

Accepted Answer

A salaried manager who has a 3 year employment contract

Question 24

Use the following two statements to answer this question:   I. The average cost curve and average variable cost curve reach their minima at the same level of output.  II. The average cost curve and marginal cost curve reach their minima at the same level of output.

Accepted Answer

BOTH ARE FALSE.

Question 25

Use the following two statements to answer this question:   I. The average total cost of a given level of output is the slope of the line from the origin to the total cost curve at that level of output.  II. The marginal cost of given of output is the slope of the line that is a tangent to the variable cost curve at that level of output.

Accepted Answer

BOTH TRUE.

Question 26

Use the following two statements to answer this question:   I. The average total cost of a given level of output is the slope of the line from the origin to the total cost curve at that level of output.   II. The marginal cost of a given level of output is the slope of the line that is tangent to the total cost curve at that level of output.

Accepted Answer

BOTH TRUE.

Question 27

For any given level of output:  A) marginal cost must be greater than average cost  B) average variable cost must be greater than average fixed cost.  C) average fixed cost must be greater than average variable cost.  D) fixed cost must be greater than variable cost  E) none of the above is necessarily correct

Accepted Answer

E) NONE OF THE ABOVE IS NECESSARILY CORRECT

Question 28

In a short-run production process, the marginal cost is rising and average total cost is falling as output increased. Thus marginal cost is

Accepted Answer

below average total cost

Question 29

Which of the following relationships is NOT valid?  A) rising marginal cost implies that average total cost is also rising.  B) when marginal cost is below average total cost, the latter is falling.  C) when marginal cost is above average variable cost, AVC is rising.  D) none of the above

Accepted Answer

A) rising marginal cost implies that average total cost is also rising

Question 30

Which always increases as output increases?

Accepted Answer

Total cost & variable cost

Question 31

Consider the following statements when answering this question:  I. A firm\'s marginal cost curve does not depend on the level of fixed costs.  II. As output increases the difference between a firm\'s average total cost & average variable cost curves cannot rise.

Accepted Answer

BOTH TRUE

Question 32

Consider the following statements when answering this question:   I. If a firm employs only one variable factor of production, labor, and the marginal product of labor is constant, then the marginal costs of production are constant too.  II. If a firm employs only one variable factor of production, labor, and the marginal product of labor is constant, then the short-run average total costs cannot rise as output rises.

Accepted Answer

BOTH TRUE.

Question 33

Consider the following statements when answering this question:  I. If the marginal product of labor falls whenever more labor is used, and labor is the only factor of production used by the firm, than at every output level the firm\'s short-run average variable cost exceeds marginal cost.  II. If labor obeys the law of diminishing returns, and is the only factor of production used by the firm, then at every output level short-run average variable costs exceed marginal costs.

Accepted Answer

I TRUE  II FALSE

Question 34

Consider the following statements when answering this question:   I. Whenever a firm\'s average variable costs are falling as output rises, marginal costs must be falling too.  II. Whenever a firm\'s average total costs are rising as output rises, average variable costs must be rising too.

Accepted Answer

I. FALSE  II. TRUE

Question 35

Consider the following statements when answering this question:  I. The marginal cost curve intersects the average total cost and average variable cost curves at their minimum values.  II. When a firm has positive fixed cost, the output level associated with minimum average variable costs is less than the output associated with minimum average total costs.

Accepted Answer

BOTH TRUE.

Question 36

If a factory has a short-run capacity constraint (e.g. an auto plant can only produce 800 cars per day at maximum capacity), the marginal cost of production becomes_____ at the capacity constraint.

Accepted Answer

Infinite

Question 37

In the short run, suppose average total of cost is a straight line and marginal cost is positive and constant. Then, we know that fixed costs must:

Accepted Answer

Equal zero

Question 38

In the short run, suppose average total cost is a straight line and marginal cost is positive and constant. Then we know that:

Accepted Answer

Average total cost is positive & constant and average total cost equals marginal cost

Question 39

In the long run, which of the following is considered a variable cost?

Accepted Answer

ALL:  expenditures for wages, research & development, raw materials, capital machinery & equipment.

Question 40

An isocost line reveals the:

Accepted Answer

Input combinations that can be purchases with a given outlay of funds.

Question 41

Assume that a firm spends $500 on two inputs, labor (graphed on the horizontal axis) and capital (graphed on the vertical axis). If the wage rate if $20 per hour & the rental cost of capital is $25 per hour, the slope of the isocost curve will be:

Accepted Answer

-4/5

Question 42

Which of the following is NOT an expression for the cost minimizing combination of inputs?

Accepted Answer

MRTS = MPL/MPK

Question 43

When an isocost line is just tangent to an isoquant, we know that

Accepted Answer

output is being produced at a minimum cost

Question 44

The total cost of producing a given level of output is

Accepted Answer

minimized when the ratio of marginal product to input price is equal for all inputs.

Question 45

A firm\'s expansion path is

Accepted Answer

a curve that shows the least-cost combination of inputs needed to produce each level of output for given input prices.

Question 46

At the optimum combination of two inputs,

Accepted Answer

ALL:  The slopes of the isoquant and isocost curves are equal. Costs are minimized for the production of a given output. The marginal rate of technical substitution equals the ratio of input prices.

Question 47

Suppose the price of labor (PL) is $10 and the price of capital (PK) is $20. What is the equation of the isocost line corresponding to a total cost of $100?

Accepted Answer

100 = 10L + 20K

Question 48

With its current levels of input use a firm\'s MRTS is 3 (when capital is on the vertical axis and labor is on the horizontal axis) This implies:

Accepted Answer

The marginal product of labor is 3 times the marginal product of capital.

Question 49

A firm employes 100 workers at a wage rate of $10 per hour, and 50 units of capital at rate of $21 per hour. The marginal product of labor is 3, and the marginal product of capital is 5. The firm

Accepted Answer

Could reduce the cost of producing its current output level by employing more labor or less capital.

Question 50

An effluent fee is imposed on a steel firm to reduce the amount of waste materials that it dumps in the river. Use the following two statements to answer this question:  I. The more easily factors of production can be substituted for one another (for example, capital can be used to reduce waste water), the more effective the fee will be in reducing effluent.   II. The greater the degree of substitution of capital for waste water, the less the firm will have to pay in effluent fees.

Accepted Answer

BOTH ARE TRUE.

Question 51

A firm wants to minimize the total cost producing 100 tons of dynamite. The firm uses two factors or production, chemicals & labor. The combination of chemicals and labor that minimizes production costs will be found where:

Accepted Answer

the production of an additional unit of dynamite costs the same regardless of whether chemicals or labor are used.

Question 52

A plant uses machinery and waste water to produce steel. The owner of the plant wants to maintain an output of 10,000 tons a day, even though the government has just imposed a $100 per gallon tax on using waste water. The reduction in the amount of waste water that results from the imposition of this tax depends on

Accepted Answer

the ratio of the marginal product of waste water to the marginal product of machinery.

Question 53

Consider the following statements when answering this question  I. With convex isoquants, a firm\'s expansion path cannot be negatively sloped.   II. If a firm uses only two factors of production, one of whose marginal product becomes negative when its use exceeds a certain level, then a cost minimizing firm\'s expansion path will have vertical or horizontal segments.

Accepted Answer

BOTH TRUE

Question 54

Suppose our firm produces chartered business flights with capital (planes) and labor (pilots) in fixed proportion (i.e. one pilot for each plane). The expansion path for this business will:

Accepted Answer

follow the 45-degree line form the origin.

Question 55

Suppose our firm produces chartered business flights with capital (planes) and labor (pilots) in fixed proportion (i.e. one pilot for each plane). If the wage rate paid to the pilots increases relative to the rental rate of capital for the airplanes, then:

Accepted Answer

the optimal capital-labor ratio should decrease

Question 56

Assume that a firm\'s production process is subject to increasing returns to scale over a broad range of outputs. Long-run average costs over this output tend to

Accepted Answer

Decline

Question 57

A firm\'s short-run average cost curve is U-shaped. Which of these conclusions can be reached regarding the firm\'s returns to scale?

Accepted Answer

The short-run average cost curve reveals nothing regarding returns to scale.

Question 58

The cost output elasticity equals 1.4. This implies that:

Accepted Answer

there are diseconomies of scale.

Question 59

The cost output elasticity is used to measure:

Accepted Answer

economies of scale

Question 60

Use the following two statements to answer this question:   I. Increasing returns to scale cause economies of scale.  II. Economies of scale cause increasing returns to scale.

Accepted Answer

I - TRUE  II - FALSE

Question 61

At the current level of ouput, long- run marginal cost is $50 and long-run average cost if $75. This implies that:

Accepted Answer

there are economies of scale.

Question 62

The cost-output elasticity is used to measure

Accepted Answer

economies of scale

Question 63

The cost output elasticity can be written and calculated as

Accepted Answer

MC/AC

Question 64

When there are economies of scale

Accepted Answer

MC

Econ Ch. 7

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