Multiple Choice Tutorial

Chapter 7
Production and Cost
of the Firm

1. The supply curve of a product is based

primarily on
a. consumer behavior
b. product decision making
c. government spending
d. none of the above
B. The supply curve represents those who are
doing the supplying, which explains why
supply curves are upward sloping (positive
slope). As the price of a product increases
the supplier has a greater incentive to supply
the product because more money can be
made at the higher prices. As the price
declines, the supplier has less incentive to 2
supply as less money can be made.

2. Economists assume that producers try to

maximize
a. revenue
b. utility
c. sales
d. profit

D. Profit is the difference between total

revenue (TR) and total cost (TC).

3. The opportunity cost of a resource

a. includes both explicit and implicit costs
b. includes explicit costs only
c. includes implicit costs only
A. Explicit costs are opportunity costs of a firms
resources that take the form of cash payments,
for example, rent, mortgage, supplies, utilities,
raw materials etc. Implicit costs are a firms
opportunity cost of using its own resources
without corresponding cash payments. For
example, when a firm uses money to pay for
raw materials that it could charge interest free,
the interest that the money could have made
earning interest is an implicit cost.
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4. When resources are owned by the firm, and

no payment is made for their use, they
a. are considered to be free resources
b. have no alternative uses
c. represent implicit costs
d. represent explicit costs

C. Everything has an opportunity cost. What

else could be done and how much money
could be earned in regards to an owned
resource? Whatever money could be earned
in the best alternative endeavor is the implicit
cost of owning a resource.
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5. Explicit costs are

a. not part of opportunity cost
b. the only cost considered in opportunity cost
c. exactly the same as implicit costs
d. actual monetary payments for resources
purchased
D. You have explicit and implicit costs while
attending college. Your explicit costs are
things like tuition, books, travel, baby sitting
and the like. Your implicit cost is the money
you gave up by not working full time at a
higher paying job than you now have. For
example, if you earn $300 a week now but
could earn $700 a week in the best
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alternative, your implicit cost is $400 a week.

6. Accounting profit is
a. equal to economic profit
b. always smaller than economic profit
c. equal to total revenue minus both implicit
and explicit costs
d. equal to total revenue minus explicit costs

D. Accountants consider money that is actually

paid to run a business as costs. Economists
consider these costs as well as money that is
foregone by not pursuing a more profitable
alternative use of the money. Therefore, there
is a difference between profit (economic
profit), normal profit, and accounting profit.7

7. Economic profit is
a. equal to accounting profit
b. always greater than accounting profit
c. equal to total revenue minus explicit costs
d. equal to total revenue minus both implicit
and explicit costs

D. When a firm makes a profit we mean that

it is making an economic profit. When total
revenue exceeds costs (in economics costs
are both implicit and explicit), the firm is
making a profit.
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8. A normal profit means that

a. economic profit is zero
b. accounting profit is zero
c. economic profit is positive
d. accounting profit is negative

A. Economic profit is zero when total revenue

equals total costs, by definition this is where a
normal profit is made. When a business
owner is making a normal profit he is
making the minimum amount of money that
will give him an incentive to stay in business.
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9. Fixed inputs are resources

a. whose quantities do not change in the
short run
b. whose quantities do not change in the
long run
c. whose quantities can be changed at any
time
d. which are too large and bulky to be
moved easily
A. Once a firm buy a machine that machine
has to be paid for regardless of the level of
output. Even if the output were zero the
payments on the machine still have to be
made. The machine is therefore a fixed cost.
10

10. The short run is defined as the period of time

a. in which all inputs are fixed
b. in which at least one input is fixed
c. in which no inputs are fixed
d. of one year or less
B. In the short run a business cannot change
its plant capacity. For example, a firm can
hire new workers (or lay off workers), have
its workers work longer hours (or fewer
hours), or change the organization of its
operations in the short run. Once it changes
its plant capacity, it moves into the long run.
Retiring machinery or taking on new
machines, moving into larger (or smaller)
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buildings are long run occurrences.

11. Total product is the same as

a. total resources used
b. total revenue
c. total utility
d. total output

D. This is just definition. Total product is

defined as the total output produced by
a firm.

12

12. The marginal product of labor is defined as

the
a. cost of one worker
b. average output per worker
c. change in revenue from using one more
unit of labor
d. change in output from using one more unit
of labor

D. The word margin always means the last unit,

the incremental change of something. For
example, if a firm hires an additional worker
and its output increases by 100 units a day, its
marginal product of labor is 100 units.
13

13. 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 is decreasing as more of the
input is used
c. can occur due to specialization and division
of labor
d. can never occur
C. If a firms costs (input prices) for raw
materials, interest costs, labor etc. stay the
same a firm can lower its costs by using what
it has more efficiently.
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14. The law of diminishing marginal returns

states that, as additional unit of the variable
input are combined with fixed inputs in the
production process, total product
a. decreases by larger and larger amounts
b. decreases by smaller and smaller amounts
c. remains constant
d. increases by smaller and smaller amounts
D. For example, if hiring a worker adds 50 units
to total product and hiring one more worker
adds 40 units to total product, the firm has
experienced the law of diminishing returns.
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15. Total product will decrease as more of an

input is added to the production process only if
a. marginal product is decreasing
b. marginal product is negative
c. the product is an inferior good
d. marginal product is zero
B. Marginal product is the change in total
product that occurs when the usage of a
particular resource increases by one unit, all
other resources constant. For example, if a
firm hires one more worker and its total
product increases, marginal product is
positive; if its total product declines when an
additional worker is hired, the marginal
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product is negative.

16. Total product is greatest where

a. marginal product is increasing
b. marginal product is zero
c. demand is unit elastic
d. supply is unit elastic

B. At the point where marginal product is zero

means that the additional input, for example
an additional worker, added nothing to the
firms total product.
17

17. From the following table, determine the

marginal product of labor when the firm
increases from three to four units of labor input:

Total Input
0
1
2
3
4
5

Total Product
0
15
35
50
60
65

a. 5
b. 10
c. 15
d. 60
e. 240

B. 60 minus 50 equals 10; 10 units have been

added to total product as we went from three
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units to four units.

18. The law of diminishing marginal returns is

first evident in the following table

Labor Input Total Product a. with the

first
0
0
worker
1
10
b. with each
2
22
of the
3
33
workers
4
40
c. with the
third
5
45
worker
C. From 0 to 1 unit TP increases by 10, from 1
to 2 units TP increases by 12, from 2 to 3
19
units TP increases by 11.

Output

Last slide viewed

TP
0

Exhibit 20.1

j Variable Input

20

19. In Exhibit 20-1, the law of diminishing

marginal returns becomes evident
immediately after point
a. 0
b. g
c. h

B. After point g as the variable input

increases output increases but a a lower
rate than previously.

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20. The law of diminishing marginal returns is

illustrated in Exhibit 20-1
a. at point g
b. at point h
c. between points g and h
d. the line from 0 to j

C. The law of diminishing marginal returns

exist when more and more of a variable
resource is added to a fixed amount of a
fixed resource, the resulting change in
output will eventually diminish and
eventually become negative.
22

21. In which segment of exhibit 20-1 is there

negative returns?
a. after 0 units
b. after g units
c. after h units
d. after j units

C. After h units as more units of the variable

resource is added total output decreases. We
do not know what is happening after j units.

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22. Fixed costs are

a. the opportunity cost of all resources used in
production
b. the explicit costs of production
c. the implicit costs of production
d. independent of the firms rate of output

D. A fixed cost is something that a firm has to

pay regardless of the level of output. For
example, if a firm owes payment on a loan,
that payment stays the same regardless of the
level of output by the firm.
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23. Which of the following is not included in

total cost?
a. cost of the product to the buyer
b. variable costs
c. explicit costs
d. implicit costs

A. What the consumer pays for the product

(the price) has nothing to do with what is
costs the firm to produce the product in the
first place.
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24. Marginal cost is defined as

a. total cost divided by output
b. the additional cost of one more unit of an
input
c. the price of the product
d. the change in total cost divided by the
change in output
D. The word margin signifies a change.
Marginal cost is a measure of how much the
last unit costs to produce. This is measured
by measuring the change in costs by
producing one more unit and dividing that
number by how much output changed.
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25. If input prices are constant, an increase in

marginal product causes
a. marginal cost to increase
b. marginal cost to decrease
c. marginal revenue to increase
d. total product to decrease
B. This would occur when a firms total costs
would not change as output increased,
therefore, its costs on the margin (also its
average costs) would decrease as output
increased. For example, if a firms total
output depends exclusively on one machine
and the one machine represents its total cost,
the firms costs decline on the margin with
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each additional unit of output.

26. Production functions such as marginal

product and cost curves such as marginal cost
tend to be
a. unrelated
b. directly related
c. inversely related
d. equal
C. The rate of change for product as units of a
resource are added tend to increase from
zero units then decrease beyond a certain
level of growth. The rate of change for costs
as more units of a resource are used tends to
decrease from zero units then increase
beyond a certain level of growth.
28

27. As long as the firm is not operating

inefficiently, which cost always increases with
increases in output?
a. marginal cost
b. average fixed cost
c. total fixed cost
d. total variable cost

D. Variable costs are costs which vary with the

level of output.

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Rs

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Q
Exhibit 2

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28. In Exhibit 2, lines H, J, and K represent the

following 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
C. Notice that the marginal cost curve
intersects the average curves at their lowest
point. The average total cost is above the
average variable cost curve because variable
31
costs are a part of total costs.

29. In Exhibit 2, average fixed cost (AFC) is

a. line H
b. the distance between lines H and J
c. the distance between lines H and K
d. the distance between lines J and K

D. What is added to average variable costs

(AVC) to equal average total costs (ATC)?
Average fixed costs (AFC). Therefore, AFC is
always the vertical distance between the AVC
curve and the ATC curve.
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30. In Exhibit 2, the marginal product is

a. line H
b. line J
c. line J minus line K
d. none of these

D. No marginal product curve is shown in

figure 2.

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31. The short-run total fixed cost curve

a. starts at the origin and always slopes
upward
b. is a vertical line intersecting the horizontal
axis
c. is a horizontal line intersecting the vertical
axis
d. is always downward-sloping

C. The vertical axis represents money.

Because fixed costs do not change as output
changes it is represented by a horizontal
line at the cost level.
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32. The short-run total cost curve

a. starts at the origin and always slopes
upward
b. starts above the origin and always slopes
upward
c. is a horizontal line intersecting the vertical
axis
d. is a vertical line intersecting the horizontal
axis
B. A firms total costs start above the margin
(where the horizontal and vertical axis meet)
because of its fixed costs. As it increases
output, its total costs normally increase
because of its variable costs. Variable costs
35
are costs which vary with the level of output.

33. The short-run marginal 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. slopes downward at low rates of output,
then slopes upward at higher rates of output

D. This is because of the law of diminishing

returns. As more and more of a resource is
added to a given amount of a fixed resource,
the resulting change in output will eventually
diminish and eventually become negative. 36

34. The short-run average fixed 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
A. For example, if a firms fixed cost is $100 its
average fixed cost is $100 at one unit of output.
If the firm produces two units of output, its
average fixed cost is $50, at four units it would
be $25. There are no fixed costs in the long-run,
so this is a short-run situation.
37

35. 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. slopes downward at low rates of output,
then slopes upward at higher rates of output

D. This is also because of the law of

diminishing returns. The law of diminishing
returns is a short-run term. Remember, in
the short-run a firm cannot change its plant
capacity, it therefore experiences fixed costs.
38

36. The slope of the short-run total cost curve

a. is constant
b. is never positive
c. equals marginal cost at the level of output
d. typically reflects diminishing returns at the
lowest levels of output

C. The slope of a line is defined as the change

vertically divided by the change horizontally,
or the rise divided by the run. Marginal cost
is measured by a change in costs (the vertical
axis) divided by the change in output (the
horizontal axis).
39

37. Short-run average fixed cost equals

a. the change in fixed cost from producing one
more unit of output
b. the change in variable cost from producing
one more unit of output
c. average total cost plus average variable cost
d. average total cost minus average variable
cost

D. Average variable costs (AVC) plus

average fixed costs (AFC) equals average
total cost (ATC). This only occurs in the
short-run because only in the short-run
are there fixed costs.
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38. 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
A. Each time the margin is greater than the
average, the average will increase; if the
margin in less than the average, the average
will decrease. If the average score on the last
exam was 80% and a student (the marginal
student) takes a makeup test and scores a
90%, the class average increases; if the
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student scores a 70%, the average decreases.

39. The shapes of the short-run cost curves

reflect
a. market demand
b. returns to scale
c. productivity of variable inputs
d. all of the above
C. If an added resource increases productivity
the cost curves will have a negative slope
showing that costs are declining as output
increases. If an added resource decreases
productivity the cost curves will have a
positive slope showing that costs are
increasing as output increases.
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40. Which of the following results from the law

of diminishing marginal returns?
a. all of the following
b. the slope of total cost becomes steeper in
the short run as more is produced
c. rising short-run marginal cost
d. declining marginal product

A. b, c and d would all occur as a firms total

product diminished as it increased its inputs
and outputs in the short-run.
* Normally we would not mention the term
short-run because the short-run is always
assumed. If we are considering the long-run,
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we have to state in the long-run.

41. 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

C. To the left of the intersection the margin is

below the average so the average decreases;
to the right of the intersection the margin is
above the average so the average increases.44

42. The average total cost curve and the average

variable cost curve
a. move closer together as output increases,
with average total cost reaching its
minimum level first
b. move farther apart as output increases,
with average variable cost reaching its
minimum level first
c. move closer together as output increases,
with average variable cost reaching its
minimum level first

C. As output increases the average fixed cost

decreases because fixed costs do not change
as the level of output changes.
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MC

40

ATC

20
15

AVC

0
Exhibit 3

6
46

43. In Exhibit 3, the total cost (TC) of producing

6 units o output would be
a. $20
b. $40
c. $35
d. $120

D. At 6 units of output average total cost

(ATC) is equal to $20, so total cost (TC) is
6 times $20 or $120.

47

44. In Exhibit 3, the total fixed cost (FC) of

producing 6 units of output would be
a. $30
b. $20
c. $35
d. $15

A. At 6 units ATC is $20 and AVC is $15, so

AFC is equal to $5. At 6 units FC is 6
times $5 or $30.

48

45. In Exhibit 3, the total variable cost (VC) of

producing 6 units of output would be
a. $30
b. $240
c. $35
d. $90

D. At 6 units average variable cost (AVC) is

equal to $15 so total variable cost (VC) is
equal to 6 times $15 or $90.

49

46. 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. explicit costs only
C. If a firm shuts down there are no variable
costs, the only costs the firm has to pay are its
fixed costs. It still has fixed costs because in
the short-run a firm cannot change its plant
capacity. There is a difference between shutting
down (stopping production) and going out of
business; when a firm goes out of business
(long-run) it no longer has fixed costs.
50

47. 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. all of the above

B. Economies of scale occurs when forces

cause a reduction in a firms average cost as
the scale of operations increases in the longrun. Diseconomies of scale occurs when
forces cause a firms average cost to increase
as the scale of operations increases in the
51
long-run. These are long-run terms.

48. To maximize profits in the long-run, any firm

must
a. charge the highest price possible
b. produce where demand is unit elastic
c. sell the most possible output
d. minimize the cost of producing any given
amount of output

D. The name of the game in business is volume.

How does a firm increase volume? It
increases sales by lowering prices. What does
it have to do first before lowering prices over
the long-run? It lowers its costs of
52
production.

49. 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

A. In the long-run all costs are variable. As a

firm grows and experiences an increase in
costs as a result, we say that the firm
experiences diseconomies of scale.

53

50. 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

C. For example, a small farmer cannot justify

using the largest and most efficient tractor
because it would not be cost effective. The
money made on a small farm (say 5 acres)
would not justify paying $100,000 for the
newest and largest tractor. Such a tractor
would be cost effective on a large farm.
54

51. 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 long-run
average cost is at a maximum
d. average of the rates of output at which
long-run average cost is at a minimum

A. When a firm produces at the level of output

which coincides with the lowest point on its
long-run ATC curve it is operating at the
most efficient level possible.
55

52. When 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

C. Economies and diseconomies of scale are

long-run terms. Economies of scale exists
when a firms output increases more than its
input increases. Diseconomies of scale exist
when a firms output increases at a lower
rate than it increases its inputs.
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END