Sample Questions on Production and Cost

1. The reason economists assume that firms try to maximize economic profit is
a. over time, firms that don't earn profits will have difficulty securing financing to survive
b. firms in the real world always maximize profit
c. profit is easier to calculate than revenues
d. if a firm fails to earn a profit in its first year, it will go out of business
e. profit maximization is easier for firms than revenue maximization
ANS: A
2. Implicit cost involves a direct cash payment for the use of a resource.
a. True
b. False
ANS: B
3. All other things constant, higher implicit cost results in lower accounting profit.
a. True
b. False
ANS: B
4. Which of the following is not an explicit cost?
a. salaries
b. sales taxes
c. the cost of utilities, such as gas and electricity
d. insurance premiums
e. the value of a firm owner's time
ANS: E
5. If Ripco owns the building where it operates, then if
a. the firm pays no rent, there is no opportunity cost
b. the firm does not rent the building to anyone else, there is no opportunity cost
c. the firm pays no rent, there is an opportunity cost
d. its usage of the building precludes it from renting to anyone else, there is an opportunity
cost
e. the firm could use the building for other things, there is no opportunity cost
ANS: D

a.
b.
c.
d.
e.

6.
Which of the following are implicit costs for a typical firm?
insurance costs
electricity costs
opportunity costs of capital owned and used by the firm
cost of labor hired by the firm
the cost of raw materials

ANS: C
7. Which of the following is not an explicit cost?
a. Payment for raw materials
b. The value of the firms owner own time
c. Wages for the workers
d. Insurance cost
e. Utilities payment
ANS: B
8. Cash payments for steel to be used in production would be an example of
a. sunk costs
b. fixed costs
c. explicit costs
d. implicit costs
e. entrepreneurial costs
ANS: C
9. A firm's opportunity costs of using resources provided by the firm's owners are called
a. sunk costs
b. fixed costs
c. explicit costs
d. implicit costs
e. entrepreneurial costs
ANS: D
10. Unlike implicit costs, explicit costs
a. reflect opportunity costs
b. include the value of the owner's time
c. are not included in a firms accounting statements
d. are actual cash payments
e. do not change as a firm's output changes
ANS: D

a.
b.
c.
d.
e.

11.
An implicit cost is
any cost a firm cannot avoid in the short run
any expenditure a firm makes
an opportunity cost
accurately measured in accounting statements
ignored by economists

ANS: C
12. Marge opens an oxygen bar in a building she owns. She used to rent the building to her brother in law
for $10,000 a year. To open the oxygen bar, Marge quit her job as a physician assistant, which paid
$80,000 a year. As a bar owner, Marge has to pay $40,000 a year wages for her bartender, spend
$25,000 a year for supplies, and the utilities bill is $9,500 a year. To cover the start-up costs, she used
up all of her savings which earned $4,600 in interest. What are her implicit costs?
a. $10,000
b. $90,000
c. $84,600
d. $94,600
e. $74,500
ANS: D
13. Marge opens an oxygen bar in a building she owns. She used to rent the building to her brother in law
for $10,000 a year. To open the oxygen bar, Marge quit her job as a physician assistant, which paid
$80,000 a year. As a bar owner, Marge has to pay $40,000 a year wages for her bartender, spend
$25,000 a year for supplies, and the utilities bill is $9,500 a year. To cover the start-up costs, she used
up all of her savings which earned $4,600 in interest. What are her explicit costs?
a. $40,000
b. $49,500
c. $84,600
d. $94,600
e. $74,500
ANS: E
14. The opportunity cost of a resource
a. includes both explicit and implicit cost
b. includes explicit cost only
c. includes implicit cost only
d. is equal to the market price of the resource
e. is not related to the market price of the resource
ANS: A

a.
b.
c.
d.
e.

15.
Explicit costs are
not part of opportunity cost
the only cost considered in opportunity cost
exactly the same as implicit costs
actual monetary payments for resources purchased
the opportunity costs of using resources owned by the firm

ANS: D
16. If all my savings are invested in my consulting company, an increase in the interest rate increases my
implicit costs.
a. True
b. False
ANS: A
17. If a firm's economic profit is positive, its accounting profit must also be positive.
a. True
b. False
ANS: A
18. The difference between a firm's total revenue and what must be paid to attract resources from their best
alternative use is called
a. total revenue
b. utility
c. economic profit
d. cost
e. production efficiency
ANS: C
19. Opportunity cost usually
a. cannot be measured
b. applies to labor but not to capital
c. is involved in calculating economic profit
d. is greater than the cash payment made to a resource
e. is less than the cash payment made to a resource
ANS: C

20.
John moved his office from a building he was renting downtown to the carriage house
he owns in back of his house. How will his costs change?
a. explicit and implicit costs rise
b. explicit costs rise; implicit costs fall
c. explicit and implicit costs fall
d. explicit costs fall; implicit costs rise
e. not enough information is given
ANS: D
21. A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job,
which pays $20,000 a year, and take over a store building that he owns and currently rents to his
brother for $6,000 a year. His expenses at the sushi bar would be $50,000 for food and $2,000 for gas
and electricity. What are his explicit costs?
a. $26,000
b. $66,000
c. $78,000
d. $52,000
e. $72,000
ANS: D
22. A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job,
which pays $20,000 a year, and take over a store building that he owns and currently rents to his
brother for $6,000 a year. His expenses at the sushi bar would be $50,000 for food and $2,000 for gas
and electricity. What are his implicit costs?
a. $26,000
b. $66,000
c. $78,000
d. $52,000
e. $72,000
ANS: A
23. Two friends, Diane and Sam, own and run a bar. Diane tends bar on Monday, Wednesday, and Friday
and receives a wage in addition to tips. Sam tends bar on Tuesday, Thursday, and Saturday and
receives only tips. Which of the following represents an implicit cost of operating the bar?
a. Diane's wage
b. Sam's time
c. Diane's tips
d. Sam's tips
e. both Diane's and Sam's tips
ANS: B

24. Maryann and Don want to open their own deli. To do so, Maryann must give up her job, at which she
earns $20,000 per year, and Don must give up his part-time job, at which he earns $10,000 per year.
They must liquidate their money market fund, which earns $1,000 interest annually. The rent on the
building is $10,000 per year, and expenses for such necessities as utilities, corned beef, and pickles are
$35,000 annually. What is the explicit cost per year of operating the deli?
a. $10,000
b. $35,000
c. $45,000
d. $31,000
e. $76,000
ANS: C
25. Amanda, age 6, opens a lemonade stand. She makes all the lemonade from a mix she found in her
parents' pantry. Her stand is an old box she found in the garage. The pitcher and paper cups were taken
from the kitchen. Which of the following is true?
a. The opportunity cost of the lemonade is zero.
b. The only opportunity cost of the lemonade is Amanda's time.
c. Amanda's explicit costs are zero.
d. The implicit costs of Amanda's lemonade are zero.
e. Whatever revenue Amanda gets will be pure economic profit.
ANS: C
26. Which of the following would not appear on a firm's accounting statement?
a. sunk costs
b. fixed costs
c. explicit costs
d. implicit costs
e. insurance costs
ANS: D
27. Accounting profit equals
a. explicit costs minus implicit costs
b. economic profit minus implicit costs
c. economic profit minus explicit costs
d. economic profit minus explicit costs and implicit costs
e. economic profit plus implicit costs
ANS: E

28.
Marge opens an oxygen bar in a building she owns. She used to rent the building to
her brother in law for $10,000 a year. To open the oxygen bar, Marge quit her job as a physician
assistant, which paid $80,000 a year. As a bar owner, Marge has to pay $40,000 a year wages for her
bartender, spend $25,000 a year for supplies, and the utilities bill is $9,500 a year. To cover the start-up
costs, she used up all of her savings which earned $4,600 in interest. Total annual revenue at the end of
the year is $450,000. Marges accounting profit is:
a. $450,000
b. $375,500
c. $169,100
d. $280,900
e. $410,000
ANS: B
29. Marge opens an oxygen bar in a building she owns. She used to rent the building to her brother in law
for $10,000 a year. To open the oxygen bar, Marge quit her job as a physician assistant, which paid
$80,000 a year. As a bar owner, Marge has to pay $40,000 a year wages for her bartender, spend
$25,000 a year for supplies, and the utilities bill is $9,500 a year. To cover the start-up costs, she used
up all of her savings which earned $4,600 in interest. Total annual revenue at the end of the year is
$450,000. Marges economic profit is:
a. $450,000
b. $375,500
c. $74,500
d. $280,900
e. $410,000
ANS: D
30. Economic profit is defined as total revenue
a. plus total costs
b. minus marginal costs
c. minus variable costs
d. minus total costs
e. minus fixed costs
ANS: D
31. Economic profit is defined as
a. total revenue minus implicit costs
b. total revenue plus explicit costs
c. total revenue plus implicit costs
d. wages plus interest minus rent
e. total revenue minus implicit and explicit costs
ANS: E

a.
b.
c.
d.
e.

32.
Which of the following would be shown on IBM's accounting statement?
revenue, implicit costs, explicit costs, and economic profit
revenue, implicit costs, explicit costs, and accounting profit
revenue, explicit costs, and economic profit
revenue, explicit costs, and accounting profit
revenue, implicit costs, and accounting profit

ANS: D
33. Maryann and Don want to open their own deli. To do so, Maryann must give up her job, at which she
earns $20,000 per year, and Don must give up his part-time job, at which he earns $10,000 per year.
They must liquidate their money market fund, which earns $1,000 interest annually. The rent on the
building is $10,000 per year, and expenses for such necessities as utilities, corned beef, and pickles are
$35,000 annually. What minimum amount of revenue per year would make it worthwhile, financially,
for Maryann and Don to operate the deli?
a. $10,000
b. $35,000
c. $45,000
d. $31,000
e. $76,000
ANS: E
34. Suppose Ernie gives up his job as financial advisor for P.E.T.S., at which he earned $30,000 per year,
to open up a store selling spot remover to Dalmatians. He invested $10,000 in the store, which had
been in savings earning 5 percent interest. This year's revenues in the new business were $50,000, and
explicit costs were $10,000. Calculate Ernie's accounting profit.
a. $10,000
b. $50,000
c. $20,000
d. $40,000
e. $9,500
ANS: D
35. Suppose Ernie gives up his job as financial advisor for P.E.T.S., at which he earned $30,000 per year,
to open up a store selling spot remover to Dalmatians. He invested $10,000 in the store, which had
been in savings earning 5 percent interest. This year's revenues in the new business were $50,000, and
explicit costs were $10,000. Calculate Ernie's economic profit.
a. $10,000
b. $50,000
c. $20,000
d. $40,000
e. $9,500
ANS: E

a.
b.
c.
d.
e.

36.
Zipco's accounting profit is equal to its
total revenue minus opportunity costs
total revenue plus opportunity costs
total revenue minus imputed costs
total revenue minus explicit costs
total revenue minus explicit and implicit costs

ANS: D
37. Economic profit is defined as
a. total revenue minus price
b. price minus quantity
c. total revenue minus what must be paid to resources to attract them from their best alternative
use
d. total revenue divided by what must be paid to resources to attract them from their best
alternative use
e. total revenue plus what must be paid to resources to attract them from their best alternative use
ANS: C
38. Zipco's economic profit is equal to its
a. total revenue minus accounting profit
b. total revenue minus explicit costs
c. total revenue plus accounting profit
d. total revenue plus opportunity costs
e. accounting profit minus implicit costs
ANS: E
39. Accounting profit is
a. always less than economic profit
b. never less than economic profit
c. equal to economic profit if a normal profit is earned
d. less than economic profit only when implicit costs are greater than explicit costs
e. greater than economic profit only when implicit costs are greater than explicit costs
ANS: B
40. Suppose Ben buys out Jerry's ownership in the firm but retains him as a salaried employee. If so,
a. economic profit increases
b. economic profit decreases
c. there is no change in economic profit
d. there is no change in accounting profit
e. accounting profit increases
ANS: C

a.
b.
c.
d.
e.

41.
Normal profit is defined as
accounting profit
economic profit
profit necessary to ensure that opportunity costs are covered
accounting profit minus economic profit
economic profit minus accounting profit

ANS: C
42. Suppose a soccer coach has been making $25,000 per year but gives up his coaching job in order to
make lace doilies. If his revenue from the sale of these doilies is $50,000 and his materials cost
$20,000, then his economic profit is
a. $5,000
b. $25,000
c. $30,000
d. $50,000
e. $80,000
ANS: A
43. Suppose Bob leaves his $50,000-a-year job as a financial advisor to P.E.T.S. and starts his own
business selling spot remover for Dalmatians. In the first year his accounting profit is $70,000. Based
on this level of success, Bob should
a. return to his old job because his economic profit is negative
b. return to his old job because his economic profit is smaller than his accounting profit
c. return to his old job because his economic profit is less than his old salary
d. stay with his new firm because his economic profit is positive
e. stay with his new firm because accounting profit is positive
ANS: D
44. Suppose a lawyer leaves his $50,000-a-year job and starts his own firm breeding pit bulls. In the first
year, his accounting profit is $70,000. The lawyer finances his new business with $100,000 from his
savings account, which had earned 10 percent interest. His economic profit is
a. $10,000
b. $60,000
c. $70,000
d. -$80,000
e. -$90,000
ANS: A

a.
b.
c.
d.
e.

45.
If General Motors is earning only a normal profit,
it is making economic profit
it is breaking even
it is suffering an economic loss
it is covering only explicit costs
it is covering only implicit costs

ANS: B
46. If the Money Store earns a normal profit this year, its
a. economic profit is equal to its accounting profit
b. economic profit is zero
c. economic profit is equal to the average accounting profit in other industries
d. accounting profit is zero
e. accounting profit is less than its economic profit
ANS: B
47. If the Baloney Store earns more than a normal profit, its
a. economic profit must be greater than its accounting profit
b. economic profit is positive
c. economic profit is, therefore, equal to its accounting profit
d. accounting profit is zero
e. accounting profit is less than its economic profit
ANS: B
48. Suppose a professor gives up her teaching job to devote her time to writing textbooks. If salaries of
professors rise,
a. her accounting profit will rise
b. her accounting profit will fall
c. her explicit costs will rise
d. her economic profit from textbooks will fall
e. her economic profit from textbooks will rise
ANS: D
49. Suppose Joan uses her savings to purchase computer equipment for her new consulting business. Soon
after this, the market interest rate rises. As a result, her
a. explicit costs rise immediately
b. accounting profit falls immediately
c. accounting profit rises immediately
d. economic profit rises immediately
e. economic profit falls immediately
ANS: E

50. John moved his office from a building he was renting downtown to the carriage house he owns in back
of his house. How will his profit change?
a. Implicit costs fall.
b. Explicit costs remain unchanged while implicit costs rise.
c. Economic profit must fall.
d. Explicit costs rise.
e. Accounting profit will rise.
ANS: E
Exhibit 7-1
Total Revenue
Assistants salary
Material & equipment
Forgone salary
Forgone interest
Foregone building rental

$100,000
$ 20,000
15,000
30,000
1,000
10,000

51. Sally owns a small business that she operates in a small building she owns. Given the information in
Exhibit 7-1, Sally's accounting profit is
a. $80,000
b. $50,000
c. $65,000
d. $35,000
e. $24,000
ANS: C
52. Sally owns a small business that she operates in a small building she owns. Given the information in
Exhibit 7-1, Sally's normal profit is
a. $80,000
b. $41,000
c. $65,000
d. $35,000
e. $24,000
ANS: B
53. Sally owns a small business that she operates in a small building she owns. Given the information in
Exhibit 7-1, Sally's economic profit is
a. $80,000
b. $50,000
c. $65,000
d. $35,000
e. $24,000
ANS: E

54. Suppose I have $1,000 to put into a one-year CD. Community Bank offers 5 percent interest,
Floatbank offers 5.25 percent, and Squidbank offers 5.40 percent. If I place my money in Squidbank,
my economic profit on the investment is
a. 5.40 percent
b. 5 percent
c. 0.40 percent
d. 0.15 percent
e. -0.40 percent
ANS: D
55. Suppose that at the current level of output, Pat's Hats has fixed costs of $500, variable costs of $1,000,
and $2,000 in total revenue. Which of the following is true?
a. Profit is currently $500 and, in the long run, it will be $1,000 because there will be no
fixed costs.
b. Profit is currently $500 and, in the long run, it will be $1,500 because there will be no
variable costs.
c. Profit is currently $500.
d. Profit is currently $500, and Pat's Hats will want to decrease its plant size in the long run to
lower its fixed costs.
e. Pat's Hats will continue to operate as long as revenue is greater than $500.
ANS: C
56. A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job,
which pays $20,000 a year, and take over a store building he owns and currently rents for $6,000 a
year. His expenses at the sushi bar would be $50,000 for food and $2,000 for gas and electricity. What
is the minimum revenue he must earn per year in order for it to be worth his while to open his sushi
bar?
a. $26,000
b. $66,000
c. $78,000
d. $52,000
e. $72,000
ANS: C
57. The graph of average fixed cost is a horizontal line.
a. True
b. False
ANS: B
58. In the long run, all of a firm's inputs are variable.
a. True
b. False
ANS: A

59. In the short run, all costs are fixed.

a. True
b. False
ANS: B
60. In the long run, all inputs are variable.
a. True
b. False
ANS: A
61. Inputs that can be increased or decreased in the short run are called
a. fixed inputs
b. variable inputs
c. economic inputs
d. accounting inputs
e. normal inputs
ANS: B
62. Which of the following is most likely to be a fixed resource for Paul's Country Fresh Pies, Inc.?
a. berries
b. flour
c. bakers
d. eggs
e. ovens
ANS: E
63. Bart operates a lemonade stand in front of his house. His father works at the Springfield Nuclear
Power Plant. Which of the following is most likely to be true?
a. The long run is the same for the power plant as it is for the lemonade stand.
b. The long run is longer for the power plant than it is for the lemonade stand.
c. The long run is shorter for the power plant than it is for the lemonade stand.
d. We cannot compare the long runs because these are different businesses.
e. It's impossible for the power plant short run to be shorter than the lemonade stand's long run.
ANS: B

a.
b.
c.
d.
e.

64.
The short run is a period of time
equal to or less than six months
during which all resources may be varied
during which all resources are fixed
during which at least one resource is fixed
during which at least one resource may be varied

ANS: D
65. Which of the following is most likely to be a fixed resource for the City Slicker's Dude Ranch?
a. the lodge where the guests stay
b. food for the guests
c. stable hands to take care of the horses
d. hay for the horses
e. water for the horses
ANS: A
66. Which of the following is most likely to be a fixed resource for the Speedy Word Processing and
Rsum Company?
a. floppy disks
b. typists
c. computer terminals
d. electricity
e. paper
ANS: C
67. Which of the following probably has the shortest long run?
a. a law firm
b. a steel mill
c. an automobile plant
d. a tire factory
e. an aircraft engine factory
ANS: A
68. Which of the following is a long-run adjustment?
a. A new economics professor is hired on campus.
b. General Motors increases its orders for steel.
c. Microsoft cuts back its hiring of new graduates.
d. Glow Electric disassembles one of its nuclear power plants.
e. Texaco buys more crude oil to refine into gasoline.
ANS: D

69.
Which of the following is a short-run adjustment?
a. Toyota builds an automobile plant in Kentucky.
b. Faced with increasing enrollment, a private college builds a new School of Business
building.
c. Because of staggering losses, three insurance companies exit the industry.
d. People's Bank hires two new tellers to meet increased demand for customer services.
e. Shaveco enters the razor blade market with a new product, produced in the United States.
ANS: D
70. Which of the following would most likely reach the long run most rapidly?
a. a nuclear power plant
b. a college
c. a lumber mill
d. a shopping mall
e. a hot dog stand
ANS: E
71. The length of time that represents the long run
a. is greater than one year
b. is greater than six months
c. is longer in service industries than in manufacturing
d. is the same for all industries
e. varies from industry to industry
ANS: E
72. The short run is a period of time
a. less than one year
b. greater than one year
c. during which all resources are variable
d. during which at least one resource is fixed
e. during which at least one resource is variable
ANS: D
73. The long run is a period of time
a. during which at least one resource is fixed
b. during which all resources are variable
c. during which all resources are fixed
d. less than one year
e. greater than one year
ANS: B

74.
a. True
b. False

If marginal product is negative, total product must be negative.

ANS: B
75. If a firm is experiencing diminishing marginal returns, its marginal product is negative.
a. True
b. False
ANS: B
76. If a firm is experiencing diminishing marginal returns, its marginal product is declining.
a. True
b. False
ANS: A
77. The additional output obtained by adding another unit of labor to the production process is called
a. the marginal cost of labor
b. the average output of labor
c. a variable cost
d. the marginal product of labor
e. the marginal utility of labor
ANS: D
78. Marginal product is defined as
a. the increase in revenue that occurs when an additional unit of a resource is added
b. the increase in output that occurs when all resources are increased by the same proportion
c. the increase in output that occurs when an additional unit of a resource is added, holding
all other resources constant
d. the amount of additional resources needed to increase output by one unit when all
resources are increased by the same amount
e. the amount of additional money needed to increase output by one unit when all resources
are held constant
ANS: C

Exhibit 7-2
Labor
0
1
2
3
4
5

Total product
(pairs of shoes)
0
20
50
75
80
75

79. Given the information in Exhibit 7-2, what is the marginal product of the third unit of labor?
a. 45 pairs of shoes
b. 25 pairs of shoes
c. 15 pairs of shoes
d. $45
e. $25
ANS: B
80. Given the information in Exhibit 7-2, at what point do diminishing marginal returns set in?
a. before the first unit of labor
b. between the first and second units of labor
c. between the second and third units of labor
d. between the third and fourth units of labor
e. between the fourth and fifth units of labor
ANS: C
81. Given the information in Exhibit 7-2, at what point do negative marginal returns set in?
a. before the first unit of labor
b. between the first and second units of labor
c. between the second and third units of labor
d. between the third and fourth units of labor
e. between the fourth and fifth units of labor
ANS: E
82. Increasing marginal returns are generally the result of
a. diseconomies of scale
b. increasing costs
c. specialization and division of labor
d. labor unions
e. technology
ANS: C

83. As Product Co. adds the first four workers to its production process in the short run, its output rises
from 0 to 12 to 25 to 35 to 43. Addition of the fifth worker will most likely lead to an output rate
a. greater than 51
b. equal to 51
c. less than 51
d. greater than 51 if the firm experiences diseconomies of scale
e. none of the above
ANS: C
Exhibit 7-12
Resource
(Labor)
0
1
2
3
4
5
6

Total product
(T-shirts)
0
20
42
62
72
74
68

84. Given the information in Exhibit 7-12, the production of T-shirts exhibits increasing marginal returns
to labor for:
a. The first worker only
b. The first two workers
c. The first three workers
d. The first four workers
e. The first five workers
ANS: B
85. Given the information in Exhibit 7-12, at what point do diminishing marginal returns set in?
a. Between the first and the second worker
b. Between the second and the third worker
c. Between the third and the fourth worker
d. Between the fourth and the fifth worker
e. Between the fifth and the sixth worker
ANS: B

86.
Given the information in Exhibit 7-12, at what point do negative marginal returns set
in?
a. Between the first and the second worker
b. Between the second and the third worker
c. Between the third and the fourth worker
d. Between the fourth and the fifth worker
e. Between the fifth and the sixth worker
ANS: E
87. The law of diminishing returns explains why
a. monopolies have a guaranteed profit margin
b. short-run MC and AVC curves are U-shaped
c. the production possibilities curve is bowed out
d. long run supply curves are downward sloping
e. total product is a straight line
ANS: B
88. If a firm is experiencing diminishing marginal returns to labor, which of the following must be true?
a. The first workers the firm hired were better than the workers hired later on.
b. The firm is experiencing decreasing returns to scale.
c. The positive effect of specialization in production is being offset by the negative effect of
crowding of inputs.
d. Output is decreasing.
e. The firm should buy more nonlabor inputs.
ANS: C
Exhibit 7-3
Number
of workers
0
1
2
3
4
5
6
7

Total
output
0
10
40
100
140
160
170
150

a.
b.
c.
d.
e.

89.
0
10
20
140/4
140

In Exhibit 7-3; the total product of four workers is

ANS: E
90. In Exhibit 7-3, the marginal product of the third worker is
a. 20
b. 100/3
c. 60
d. 50
e. 140
ANS: C
91. In Exhibit 7-3, diminishing marginal returns set in with the addition of the
a. first worker
b. third worker
c. fourth worker
d. fifth worker
e. seventh worker
ANS: C
92. The law of diminishing marginal returns states that
a. long-run average cost declines as output increases
b. if the marginal product is above the average product, the average will rise
c. as units of a variable input are added to a given amount of fixed inputs, the marginal
product of the variable input eventually diminishes
d. as a person consumes more of a good, the marginal satisfaction from that good eventually
diminishes
e. if marginal product is positive, total product rises
ANS: C
93. If total product for each of five units of labor is 10, 16, 20, 30, and 34, respectively, the marginal
product of the third unit is
a. 20
b. 10
c. 4
d. 0
e. 6
ANS: C

Exhibit 7-4
Units of
labor
0
1
2
3
4
5
6

Total
product
0
6
14
24
36
42
46

Marginal
product
6
8
10
12
6
4

94. In Exhibit 7-4, marginal returns increase with the hiring of up to _____ worker(s).
a. one
b. two
c. three
d. four
e. five
ANS: D
95. In Exhibit 7-4, marginal returns begin to diminish with the hiring of the _____ worker.
a. second
b. third
c. fourth
d. fifth
e. sixth
ANS: D
96. The law of diminishing marginal returns is first evident in the following table
Labor
Input
0
1
2
3
4
5
6
a.
b.
c.
d.
e.

Total
Product
0
10
22
33
40
45
42

when the first worker begins

with each of the workers
when the third unit of labor is added
with the last unit of labor input
when the fourth unit of labor is added

ANS: C

97. When marginal product is negative, the slope of the total product curve must be negative.
a. True
b. False
ANS: A
98. If the marginal product of an input is negative, the total product must also be negative.
a. True
b. False
ANS: B
99. When diminishing marginal returns set in, total product
a. is negative
b. decreases at an increasing rate
c. decreases at a decreasing rate
d. increases at an increasing rate
e. increases at a decreasing rate
ANS: E
100. When diminishing marginal returns set in, marginal product is
a. positive and increasing
b. positive and decreasing
c. negative and increasing
d. negative and decreasing
e. zero
ANS: B
101. In the range of increasing marginal returns, total product is
a. increasing at a constant rate
b. increasing at an increasing rate
c. increasing at a decreasing rate
d. decreasing at an increasing rate
e. decreasing at a decreasing rate
ANS: B
102. At the point where diminishing marginal returns set in, the slope of the total product curve is
a. positive and increasing
b. positive and decreasing
c. negative and increasing
d. negative and decreasing
e. constant
ANS: B

103. Which of the following is true of marginal product?

a. The firm should produce where marginal product is greatest.
b. The firm should produce where marginal product is increasing.
c. When marginal product is falling, total product is falling.
d. The firm should produce where marginal product is zero.
e. When marginal product is increasing, total product is increasing by increasing amounts.
ANS: E
104. The marginal product of labor is the
a. cost of one worker
b. average output per worker
c. change in revenue from selling one more unit of output
d. change in revenue from using one more unit of labor
e. change in output from using one more unit of labor
ANS: E
105. To a firm facing constant input prices, increasing marginal returns
a. means that each additional unit of output costs more to produce than the previous unit
b. means that the marginal product of the variable input decreases as more of the input is used
c. can occur due to specialization and division of labor
d. usually occur at very high rates of output
e. can never occur
ANS: C
106. Which of the following is most likely to be a fixed cost for any firm?
a. the monthly electric bill
b. sales taxes
c. shipping and postage costs
d. rent on office space
e. charitable donations
ANS: D
107. Which of the following is a fixed cost for Wendy's Hamburgers?
a. the cost of beef
b. electricity to light up the Wendy's sign
c. gasoline for the trucks that deliver supplies to the various franchises
d. interest on funds borrowed to build new facilities
e. expenditures on paper and plastic for packaging
ANS: D

a.
b.
c.
d.
e.

108.
A variable cost is one that changes
in the long run only
in the short run only
year to year
month to month
as output changes

ANS: E
109. For a person who owns and operates an automobile, insurance premiums are a _____ and maintenance
and repairs are a _____.
a. revenue; cost
b. fixed cost; fixed cost
c. variable cost; variable cost
d. variable cost; fixed cost
e. fixed cost; variable cost
ANS: E
110. Which of the following is a fixed cost of preparing meals?
a. dishwasher detergent
b. chicken
c. salad
d. a microwave oven
e. electricity
ANS: D
111. Which of the following is a fixed cost of driving a car?
a. gasoline
b. maintenance
c. tires
d. license plates
e. motor oil
ANS: D

112.
Jerrys ice-cream parlor is hosting Andrews birthday party in one week. Overall, 25 to
30 people will attend the party and Andrews costs are as follows: $200 for rent, $150 for the cake, $3
per person for customized invitations, $15 per person for the meal, $50 for decorations, and $8 per
person for party favors. For simplicity, assume that Andrew is considered one of the guests and he
receives an invitation too. Assuming that 25 people attend the party, the fixed cost of the party is:
a. $400
b. $1,050
c. $650
d. $350
e. $250
ANS: A
113. Jerrys ice-cream parlor is hosting Andrews birthday party in one week. Overall, 25 to 30 people will
attend the party and Andrews costs are as follows: $200 for rent, $150 for the cake, $3 per person for
customized invitations, $15 per person for the meal, $50 for decorations, and $8 per person for party
favors. For simplicity, assume that Andrew is considered one of the guests and he receives an
invitation too. Assuming that 25 people attend the party, the variable cost of the party is:
a. $400
b. $1,050
c. $650
d. $350
e. $26
ANS: C
114. Jerrys ice-cream parlor is hosting Andrews birthday party in one week. Overall, 25 to 30 people will
attend the party and Andrews costs are as follows: $200 for rent, $150 for the cake, $3 per person for
customized invitations, $15 per person for the meal, $50 for decorations, and $8 per person for party
favors. For simplicity, assume that Andrew is considered one of the guests and he receives an
invitation too. Assuming that 25 people attend the party, the total cost of the party is:
a. $400
b. $1,050
c. $650
d. $350
e. $426
ANS: B
115. In the short run, which of the following is likely to be a variable cost to a physician?
a. office space
b. computers
c. liability insurance
d. insurance forms
e. examining table
ANS: D

116. If fixed cost at Q = 100 is $130, then

a. fixed cost at Q = 0 is $0
b. fixed cost at Q = 0 is less than $130
c. fixed cost at Q = 200 is $260
d. fixed cost at Q = 200 is $130
e. it is impossible to calculate fixed costs at any other quantity
ANS: D
117. Which of the following would not be considered a fixed cost for a law firm?
a. paper for the photocopy machine
b. property taxes
c. insurance premiums
d. license fees
e. interest on loans
ANS: A
118. Fixed costs are defined as
a. the total costs of a firm's production
b. the additional cost of the last unit produced
c. costs that increase proportionately as the quantity produced increases
d. costs that do not vary as quantity produced increases
e. implicit costs only
ANS: D
119. When marginal cost is decreasing, total cost is rising.
a. True
b. False
ANS: A
120. Which of the following best explains why marginal cost eventually increases as output increases?
a. economies of scale occur
b. average cost increases
c. total cost increases
d. marginal product decreases
e. fixed cost is constant
ANS: D

a.
b.
c.
d.
e.

121.
What is true of marginal cost when marginal returns are increasing?
It is negative and increasing.
It is negative and decreasing.
It is positive and increasing.
It is positive and decreasing.
It is positive and has a constant slope.

ANS: D
122. What is true of marginal cost when marginal returns are decreasing?
a. It is negative and increasing.
b. It is negative and decreasing.
c. It is positive and increasing.
d. It is positive and decreasing.
e. It is positive and has a constant slope.
ANS: C
123. What is the relationship between marginal cost and marginal product?
a. The two are not related.
b. When marginal product increases, marginal cost increases.
c. When marginal product increases, marginal cost falls.
d. When marginal product is negative, marginal costs are negative.
e. When diminishing marginal returns set in, marginal costs fall.
ANS: C
124. When a firm is experiencing diminishing marginal returns, marginal cost is
a. rising
b. falling
c. constant
d. rising at first, then falling
e. zero
ANS: A
125. As output rises, marginal product eventually diminishes and
a. marginal cost increases
b. average cost falls
c. total cost falls
d. fixed cost is increasing
e. average product is negative
ANS: A

126.
The Toys-R-Danger-Us Toy Company can produce 500 water pistols for a total cost of
$1,400. If the variable cost of producing 500 water pistols is $1,300, then
a. fixed cost must be $100
b. marginal cost must be $1,300
c. marginal cost must be increasing
d. average variable cost must be decreasing
e. average fixed cost must be constant
ANS: A
127. The Toys-R-Danger-Us Toy Company can produce 500 water pistols for a total cost of $1,400. The
company can also produce 1,000 water pistols for a total cost of $3,000, but it would have costs of
$200 even if it produced no water pistols. Which of the following is true?
a. Total cost is increasing at a decreasing rate.
b. Total cost is increasing at a constant rate.
c. Marginal cost is positive and increasing as output increases.
d. Variable cost is positive and decreasing as output increases.
e. Fixed cost is positive and decreasing as output increases.
ANS: C
128. If variable cost at each output level doubles,
a. ATC doubles
b. AFC doubles
c. MC remains unchanged
d. MC doubles
e. MC less than doubles
ANS: D
129. If variable cost rises from $60 to $100 as output increases from 15 to 20 units, the marginal cost of the
twentieth unit
a. is $100
b. is $5
c. is $40
d. is $8
e. cannot be determined without total cost
ANS: D

130.
Suppose Guild produces 5,000 guitars per year. Its average total cost is $90, and its
fixed cost is $250,000. What is its variable cost?
a. $250,000
b. $450,000
c. $25,000
d. $56,000
e. $200,000
ANS: E
131. Which of the following statements is true? If the marginal product of labor diminishes,
a. average fixed cost rises
b. average variable cost is constant
c. marginal cost rises
d. average total cost must rise
e. total cost rises at a diminishing rate
ANS: C
132. If labor is a firm's only variable input, marginal cost ultimately depends on
a. fixed cost
b. how much profit is made
c. the price of the good produced
d. how much output each worker produces
e. fixed cost per unit
ANS: D
133. On a graph of production costs, the vertical distance between the fixed cost curve and the total cost
curve at a specific quantity represents
a. variable cost
b. average variable cost
c. average total cost
d. average fixed cost
e. marginal cost
ANS: A
134. Total fixed cost divided by the level of output yields
a. average variable cost per unit
b. average fixed costs per unit
c. marginal cost per unit
d. average total cost per unit
e. marginal productivity per unit of fixed resource
ANS: B

Exhibit 7-5
Output
per day
0
5
15
18
20

Workers
per day
0
1
2
3
4

Total
cost
$10
20
30
40
50

135. In Exhibit 7-5, what is fixed cost at 15 units of output?

a. $0
b. $10
c. $30
d. it is impossible to calculate fixed cost unless we know the daily wage
e. it is impossible to calculate fixed cost unless we know variable cost at Q = 0
ANS: B
136. In Exhibit 7-5, what is fixed cost at 20 units of output?
a. $0
b. $10
c. $40
d. it is impossible to calculate fixed cost unless we know the daily wage
e. it is impossible to calculate fixed cost unless we know variable cost at Q = 15
ANS: B
137. In Exhibit 7-5, what is variable cost when no output is being produced?
a. $0
b. $10
c. infinity
d. it is impossible to calculate variable cost unless we know the daily wage
e. it is impossible to calculate variable cost unless we know fixed cost at Q = 0
ANS: A
138. In Exhibit 7-5, what are variable costs at 15 units of output?
a. $30
b. $10
c. $1
d. $20
e. it is impossible to calculate variable cost unless we know the daily wage
ANS: D

a.
b.
c.
d.
e.

139.
In Exhibit 7-5, what is the marginal cost of the 15th unit of output?
$30
$10
$1
$20
it is impossible to calculate marginal cost unless we know the daily wage

ANS: C
Exhibit 7-6
Output
0
10
20
30
40
50

Rent
$200
200
200
200
200
200

Cost of
Labor
$ 0
100
200
250
350
500

Materials
$ 0
100
200
300
400
500

140. Given the information in Exhibit 7-6, what is fixed cost?

a. $0
b. $200
c. $500
d. fixed cost depends on output level
e. we cannot calculate fixed cost without knowing which inputs are fixed
ANS: B
141. In Exhibit 7-6, the marginal cost of the 40th unit of output is
a. $20
b. $35
c. $200
d. $350
e. $1,000
ANS: A
142. In Exhibit 7-6, which costs are fixed costs?
a. rent, labor costs, and material costs
b. rent and labor costs
c. rent and material costs
d. labor and material costs
e. rent only
ANS: E

a.
b.
c.
d.
e.

143.
$2
$20
$30
$100
$1,100

In Exhibit 7-6, the average total cost of producing 20 units is

ANS: C
144. In Exhibit 7-6, the average variable cost of producing 20 units is
a. $20
b. $25
c. $22
d. $250
e. $350
ANS: A
Exhibit 7-7

145. Fixed cost in Exhibit 7-7 equals

a. $20
b. $30
c. $50
d. $280
e. we cannot calculate fixed cost
ANS: C

a.
b.
c.
d.
e.

146.
Total cost is calculated as
average fixed cost plus average variable cost
fixed cost plus variable cost
the additional cost of the last unit produced
marginal cost plus variable cost
marginal cost plus fixed cost

ANS: B
147. Total cost is calculated as
a. FC + MC
b. FC / MC
c. (VC + FC) / MC
d. VC + FC
e. VC output
ANS: D
148. A firm enters into a consent decree to avoid an even greater legal setback. If the terms of the consent
decree effectively double the firm's fixed costs, then
a. marginal cost more than doubles
b. marginal cost doubles
c. marginal cost remains unchanged
d. average total cost remains unchanged
e. average variable cost doubles
ANS: C
149. When marginal product is decreasing, marginal cost is
a. less than zero
b. equal to zero
c. constant
d. decreasing
e. increasing
ANS: E
150. If a firm shuts down in the short run and produces no output, its total cost will be
a. zero
b. equal to total variable cost
c. equal to total fixed cost
d. equal to explicit costs only
e. impossible to calculate
ANS: C

151.
If total cost at Q = 0 is $100 and total cost at Q = 10 is $500, then average variable
cost at Q = 10 is
a. $500
b. $400
c. $50
d. $40
e. $10
ANS: D
152. Jerrys ice-cream parlor is hosting Andrews birthday party in one week. Overall, 25 to 30 people will
attend the party and Andrews costs are as follows: $200 for rent, $150 for the cake, $3 per person for
customized invitations, $15 per person for the meal, $50 for decorations, and $8 per person for party
favors. For simplicity, assume that Andrew is considered one of the guests and he receives an
invitation too. Assuming that 25 people attend the party, the average variable cost of the party is:
a. $16
b. $1,050
c. $42
d. $350
e. $26
ANS: E
153. Jerrys ice-cream parlor is hosting Andrews birthday party in one week. Overall, 25 to 30 people will
attend the party and Andrews costs are as follows: $200 for rent, $150 for the cake, $3 per person for
customized invitations, $15 per person for the meal, $50 for decorations, and $8 per person for party
favors. For simplicity, assume that Andrew is considered one of the guests and he receives an
invitation too. Assuming that 25 people attend the party, the average total cost of the party is:
a. $16
b. $1,050
c. $42
d. $350
e. $26
ANS: C
154. Jerrys ice-cream parlor is hosting Andrews birthday party in one week. Overall, 25 to 30 people will
attend the party and Andrews costs are as follows: $200 for rent, $150 for the cake, $3 per person for
customized invitations, $15 per person for the meal, $50 for decorations, and $8 per person for party
favors. For simplicity, assume that Andrew is considered one of the guests and he receives an
invitation too. What happens with the average fixed cost when the number of guests increases from 25
to 30?
a. decreases from $42 to $39.33
b. decreases from $16 to $13.33
c. increases from $16 to $42
d. increases from $3 to $5
e. stays the same
ANS: B

Exhibit 7-8

155. In Exhibit 7-8, the vertical distance between lines B and C at any level of output represents
a. marginal cost
b. average total cost
c. average variable cost
d. average fixed cost
e. average marginal cost
ANS: D
156. In Exhibit 7-8, when output is 10,
a. total cost equals $10
b. fixed cost equals $1
c. variable cost equals $10
d. marginal cost equals $10
e. fixed cost equals $10
ANS: C
157. In Exhibit 7-8, when output is 10,
a. total cost equals $80
b. fixed cost equals $10
c. variable cost equals $70
d. marginal cost equals $10
e. fixed cost equals $7
ANS: A

a.
b.
c.
d.
e.

158.
In Exhibit 7-8, curve B represents
marginal cost
average total cost
average variable cost
average fixed cost
average marginal cost

ANS: C
159. The short-run average variable cost curve
a. is always downward-sloping
b. starts at the origin and always slopes upward
c. starts above the origin and always slopes upward
d. is a horizontal line intersecting the vertical axis
e. slopes downward at low rates of output, then slopes upward at higher rates of output
ANS: E
160. The average total cost curve and the average variable cost curve
a. are closer together as output increases, with average variable cost reaching its minimum level
first
b. are closer together as output increases, with average total cost reaching its minimum level first
c. are farther apart as output increases, with average variable cost reaching its minimum level
first
d. are farther apart as output increases, with average total cost reaching its minimum level first
e. are parallel to each other, and reach their minimum levels at the same rate of output
ANS: A
161. As a firm expands into overseas markets, information problems and the complexity of operating within
many varied cultures and economies may result in
a. constant returns to scale
b. diminishing marginal returns
c. declining long-run marginal cost
d. diseconomies of scale
e. economies of scale
ANS: D
162. The marginal cost curve intersects the minimum point of the average variable cost curve.
a. True
b. False
ANS: A

163.
If the average height in the classroom were 5 feet 10 inches and Patrick Ewing, who is
7 feet tall, came in and sat down,
a. the average height would rise to 7 feet
b. the marginal height would be 5 feet 10 inches
c. the average height would not change
d. the average height would rise somewhat
e. the marginal height would rise
ANS: D
164. Which of the following correctly describes the relationship between the marginal cost and average
variable cost curves?
a. MC is everywhere above AVC
b. AVC is everywhere above MC
c. MC crosses AVC at AVC's minimum point
d. MC crosses AVC at MC's minimum point
e. both AVC and MC first rise and then fall
ANS: C
165. If marginal cost exceeds average variable cost,
a. average variable cost is negative
b. average variable cost is increasing
c. marginal cost is greater than average total cost
d. average variable cost is decreasing
e. average fixed cost is increasing
ANS: B
166. If marginal cost is less than average total cost,
a. marginal cost must be falling
b. average total cost must be increasing
c. average variable cost equals average total cost
d. average variable cost must be decreasing
e. average variable cost may be increasing or decreasing
ANS: E

167.
Which of the following is true of the MC curve?
a. It intersects the ATC curve at its minimum, but it does not intersect the AVC curve at its
minimum.
b. It intersects the AVC curve at its minimum, but it does not intersect the ATC curve at its
minimum.
c. It intersects both the ATC and the AVC curves at their minimums.
d. It intersects both the ATC and the AFC curves at their minimums.
e. It intersects both the AVC and the AFC curves at their minimums.
ANS: C
168. Jerrys ice-cream parlor is hosting Andrews birthday party in one week. Overall, 25 to 30 people will
attend the party and Andrews costs are as follows: $200 for rent, $150 for the cake, $3 per person for
customized invitations, $15 per person for the meal, $50 for decorations, and $8 per person for party
favors. For simplicity, assume that Andrew is considered one of the guests and he receives an
invitation too. Assuming that 25 people attend the party, what is the marginal cost of having the 26 th
guest at the party?
a. $42
b. $26
c. $16
d. $8
e. $15
ANS: B
169. As output expands, the slope of the average total cost curve
a. stays negative throughout
b. stays positive throughout
c. is first negative and then positive
d. is first positive and then negative
e. is constant
ANS: C
170. Which of the following is true in the short run at the output level where average total cost is at its
minimum?
a. Marginal cost equals average total cost.
b. Average variable cost equals fixed cost.
c. Marginal cost equals average variable cost.
d. Average total cost equals average fixed cost.
e. Average total cost equals average variable cost.
ANS: A
171. The marginal cost curve intersects the average total cost curve (ATC)
a. at the ATC's minimum point
b. only when the ATC is sloping upward
c. at the ATC's maximum point
d. only when the ATC is sloping downward
e. when the ATC intersects the fixed cost curve

ANS: A
172. The marginal cost curve intersects the average variable cost curve (AVC)
a. only when the AVC is rising
b. at the AVC curve's maximum point
c. at the AVC curve's minimum point
d. only when the AVC is sloping downward
e. when the AVC intersects the fixed cost curve
ANS: C
173. The relationship between average and marginal variables can be stated as follows: if the marginal is
greater than the average,
a. the average is increasing
b. the average is decreasing
c. the marginal is increasing
d. the marginal is decreasing
e. the total is decreasing
ANS: A
174. With respect to the average cost curves, the marginal cost curve
a. intersects average total cost, average fixed cost, and average variable cost at their
minimum points
b. intersects average total cost, average fixed cost, and average variable cost at their
maximum points
c. intersects both average total cost and average variable cost at their minimum points
d. intersects average total cost where it is increasing and average variable cost where it is
decreasing
e. intersects only average total cost at its minimum point
ANS: C

a.
b.
c.
d.
e.

175.
The shape of short-run variable cost curve is determined by
the firm's effort to minimize cost
the firm's effort to maximize profit
competition in the industry
the marginal productivity of the variable inputs the firm uses
the money the firm spends

ANS: D
176. The long-run average cost curve is tangent to the minimum point of every short-run average total cost
curve.
a. True
b. False
ANS: B
177. Long-run average costs are the same as long-run total costs
a. True
b. False
ANS: A
178. A firm's long-run average cost curve is also called its
a. profit curve
b. explicit cost curve
c. opportunity cost curve
d. production curve
e. planning curve
ANS: E
179. Which of the following is also known as the firm's planning curve?
a. the average total cost curve
b. the total cost curve
c. the long-run average cost curve
d. the long-run marginal cost curve
e. the fixed cost curve
ANS: C

a.
b.
c.
d.
e.

180.
For each size of plant a manufacturer could build, there is a different
long-run average fixed cost curve
long-run average variable cost curve
short-run average total cost curve
long-run average total cost curve
long-run marginal cost curve

ANS: C
181. Empirical studies of production suggest that the long-run average cost curve
a. is U-shaped
b. has an inverted L shape
c. is L-shaped
d. is horizontal
e. shows diminishing marginal returns
ANS: A
Exhibit 7-9

182. If the firm represented in Exhibit 7-9 wants to produce output level q, then in the long run it should
build a plant size with average total cost curve of
a. 1
b. 2
c. 3
d. 4
e. the question cannot be answered with the information given
ANS: B

Exhibit 7-10

183. In Exhibit 7-10, lines H, J, and K represent, respectively,

a. marginal product, average product, and total product
b. average fixed cost, average total cost, and average variable cost
c. marginal cost, average total cost, and average variable cost
d. average total cost, marginal cost, and average variable cost
e. marginal cost, average product, average total cost
ANS: C
184. The shape of the long-run average cost curve reflects
a. market demand
b. economies and diseconomies of scale
c. increasing and diminishing marginal returns
d. productivity of fixed inputs
e. all of the above
ANS: B
185. If a firm is producing at its minimum efficient scale, increasing its output slightly will lead to
diseconomies of scale.
a. True
b. False
ANS: A
186. If a firm experiencing "economies of scale" decreases its output, its long-run average cost will
decrease.
a. True
b. False
ANS: B

a.
b.
c.
d.
e.

187.
Economies of scale occur where
long-run average cost falls as new firms enter the industry
short-run average cost falls as new firms enter the industry
long-run average cost falls as one firm expands plant size
short-run average cost falls as one firm expands plant size
long-run average cost rises as one firm expands plant size

ANS: C
188. Which economic concept explains why a large drugstore chain can produce at a lower average cost
than Whoville Pharmacy, an individually owned drugstore?
a. increasing marginal returns
b. diminishing marginal returns
c. economies of scale
d. diseconomies of scale
e. constant returns to scale
ANS: C
189. Doubling the circumference of an oil pipeline more than doubles the volume of oil that can be pumped
through. This is an example of
a. production inefficiency
b. diminishing marginal returns
c. diseconomies of scale
d. constant returns to scale
e. economies of scale
ANS: E
190. For building contractors, doubling the size of an office building does not require double the inputs
because there are common walls. This is an example of
a. increasing marginal product
b. diminishing marginal returns
c. economies of scale
d. diseconomies of scale
e. constant returns to scale
ANS: C
191. To maximize profit in the long run, a firm must
a. charge the highest price possible
b. produce where demand is unit elastic
c. sell the most output possible
d. minimize the cost of producing any given amount of output
e. produce at minimum long-run total cost
ANS: D

192. Economies of scale can be caused by

a. all of the following
b. short-run increases in marginal productivity
c. the use of larger, more specialized machines
d. higher information costs as a firm expands
e. bureaucratic red tape as a firm expands
ANS: C
193. The minimum efficient scale for a firm is the
a. lowest rate of output at which long-run average cost is at a minimum
b. lowest rate of output at which short-run average total cost is at a minimum
c. lowest rate of output at which short-run average variable cost is at a minimum
d. average of the rates of output at which long-run average cost is at a minimum
e. average of the rates of output at which short-run average total cost is at a minimum
ANS: A
194. Someone once said that Chevrolet is so large that if it shakes its tail, its takes two years for its head to
notice it. This is an example of
a. profit centers
b. economies of scale
c. diseconomies of scale
d. diminishing marginal returns
e. diminishing marginal cost
ANS: C
195. In recent years, the number of farms has fallen while the average farm size has increased. What
concept may explain this phenomenon?
a. diminishing marginal returns
b. declining productivity
c. diseconomies of scale
d. economies of scale
e. good weather in midwestern states
ANS: D
196. Which of the following reflects diseconomies of scale?
a. Marginal product decreases as output increases.
b. Short-run marginal cost increases as output increases.
c. Long-run marginal cost increases as output increases.
d. Short-run average cost increases as output increases.
e. As output doubles, long-run total cost more than doubles.
ANS: E

197. If General Electric finds that when it doubles both its plant size and the amount of associated inputs,
its output level does not double, then
a. the law of diminishing returns is in effect
b. long-run average costs must be decreasing
c. the firm is experiencing diseconomies of scale
d. the firm should increase production
e. the firm is experiencing constant returns to scale
ANS: C
198. As output increases, diseconomies of scale
a. lead to rising long-run average costs
b. lead to declining long-run average costs
c. lead to rising short-run average total costs
d. lead to declining short-run total cost
e. means the law of diminishing marginal returns is affecting production
ANS: A
199. If a firm triples all of its inputs and its output doubles, it is said to be experiencing
a. diminishing marginal returns
b. increasing marginal returns
c. diseconomies of scale
d. economies of scale
e. constant average costs
ANS: C
200. At a given rate of output, marginal cost equals the slope of the
a. long-run average cost curve
b. short-run average total cost curve
c. planning curve
d. total cost curve
e. average variable cost curve
ANS: D
201. Marginal cost indicates how much total cost increases if one more unit is produced or how much total
cost drops if production declines by one unit.
a. True
b. False
ANS: A

202.
The least-cost way of producing a particular rate of output is represented by a point of
tangency between a short-run average cost curve and the
a. total cost curve
b. short-run average total cost curve
c. average variable cost curve
d. long-run average cost curve
e. marginal cost curve
ANS: D