Chapter12—TheFirm:ProductionandCosts
TRUE/FALSE
1. Explicitcostsincludebothwagespaidtoworkersandtheopportunitycostofusingone’sownland,labor,orcapital.
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2. Becauseimplicitcostsdonotrepresentanexplicitoutlayofmoney,theyarenotrealcosts.
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3. Wheneconomistssayfirmstrytomaximizeprofits,theymeanthatfirmstrytomaximizethedifferencebetweenwhattheyreceivefortheirgoodsandservicesintotalrevenueandwhattheygiveupfortheirinputsintotalcosts(explicitandimplicit).
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4. Economicprofitsequalactualrevenuesminusallexplicitandimplicitcosts.
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5. Economistsconsiderazeroeconomicprofittobelessthananormalprofitrate.
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6. Earningzeroeconomicprofitisdifferentfromearningzeroaccountingprofit.
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7. Sunkcostsareirrelevantforanyfutureaction.
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8. Theshortrunisdefinedasaperiodtoobriefforsomeinputstobevaried.
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9. Inthelongrun,theinputsthatdonotchangewithoutputarecalledfixedinputsorfixedfactorsofproduction.
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10. Thelongruncanvaryconsiderablyinlengthfromindustrytoindustry.
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11. Totalproductwilltypicallystartatalowlevelandincreaseslowlyatfirstandthenmorerapidlyastheamountofthevariableinputincreases.
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12. Marginalproductfirstrisesastheresultofmoreeffectiveuseoffixedinputsandthenfalls.
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13. Diminishingmarginalproductstemsfromthecrowdingofthefixedinputswithmoreandmoreofthevariableinput.
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14. Afirmneverknowinglyallowsitselftoreachthepointwherethemarginalproductbecomesnegative.
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15. Ifafirmwereproducingatthelevelwherethemarginalproductofaninputwasnegative,itsprofitswouldbelowerasaresult.
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16. Fixedcostsforagivenperiodhavetobepaidonlyifafirmproducesoutputinthatperiod.
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17. Variablecostsvarywiththelevelofoutput,whilefixedcostsdonot.
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18. Marginalcostshowsthechangeintotalcostsassociatedwithachangeinoutputbyoneunit,orthecostofproducingonemoreunitofoutput.
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19. Marginalcostsarereallyjustausefulwaytoviewchangesinfixedcostsasoutputchanges.
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20. Thetotalcostcurveisthesummationofthetotalvariablecostandtotalfixedcostcurves.
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21. Theaveragefixedcostcurveisalwaysahorizontalline,becausefixedcostsdonotchangewithoutput.
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22. Themarginalcostcurvecrossestheaveragevariablecostandaveragetotalcostcurvesatthosecurves’lowestpoints.
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23. Atoutputlevelswhereaveragetotalcostisrising,marginalcostmustbegreaterthanaveragetotalcost.
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24. Theaveragefixedcostcurvedeclineswhetherthemarginalcostcurveisrisingorfalling.
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25. TheaveragetotalcostcurveisusuallyU-shaped.
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26. Itisthedecliningaveragevariablecostcurvethatisprimarilyresponsibleforthefallingsegmentoftheaveragetotalcostcurve.
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27. Diminishingmarginalproductfirstsetsinattheminimumpointoftheaveragetotalcostcurve.
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28. Diminishingmarginalproductcausesthemarginalcostcurvetoincrease,eventuallycausingtheaveragevariablecostandaveragetotalcostcurvestorise.
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29. MCisequaltoAVCatthelowestpointontheAVCcurve,anditisequaltoATCatthelowestpointontheATCcurve.
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30. Overlongenoughtimeperiods,firmscanvaryalloftheirproductiveinputs.
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31. AswemovealongtheLRATC,thefactorysizechangeswiththequantityofoutput.
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32. Atypicalfirmexperienceseconomiesofscaleatlowlevelsofoutput,constantreturnstoscaleathigherlevelsofoutput,anddiseconomiesofscaleatstillhigherlevelsofoutput.
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33. Diseconomiesofscalemayexistbecauseafirmcanusemassproductiontechniquesorcapturegainsfromfurtherlaborspecializationnotpossibleatlowerlevelsofoutput.
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34. Wheninputpricesortechnologychanges,thecostcurvesofafirmwillshift.
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MULTIPLECHOICE
1. Anexplicitcost
a. isanopportunitycost. b. isanout-of-pocketexpense. c. doesnotrequireanoutlayofmoney. d. ischaracterizedbybothaandb. e. ischaracterizedbybothaandc.
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2. Whichofthefollowingisfalse?
a. Explicitcostsareinputcoststhatrequireamonetarypayment. b. Implicitcostsdonotrepresentanexplicitoutlayofmoney. c. Bothimplicitandexplicitcostsareopportunitycosts. d. Sunkcostsareirrelevantforanyfutureaction. e. Alloftheabovearetrue.
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3. Whichofthefollowingisfalse?
a. Profitsareafirm’stotalrevenueminusitstotalcosts. b. Accountingprofitsareactualrevenuesminusactualexpendituresofmoney. c. Economicprofitsareactualrevenuesminusallexplicitandimplicitcosts. d. Ifafirmhasanyimplicitcosts,itseconomicprofitsexceeditsaccountingprofits. e. Alloftheabovearetrue.
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4. Thecrucialdifferencebetweenhoweconomistsandaccountantsanalyzetheprofitabilityofabusinesshastodowithwhetherornotareincludedwhencalculatingtotalproductioncosts.
a. implicitcosts b. cashpayments c. sunkcosts d. explicitcosts
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5. Whichofthefollowingistrue?
a. Ifafirm’simplicitcostsarezero,accountingprofitsequaleconomicprofits. b. Ifafirm’simplicitcostsarepositive,accountingprofitsexceedeconomicprofits. c. Ifafirm’simplicitcostsarepositive,economicprofitsexceedaccountingprofits. d. Bothaandbaretrue. e. Bothaandcaretrue.
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6. Cassieproducesandsells300jarsofhomemadejellyeachmonthfor$3each.Eachmonth,shepays$200forjars,pays$150foringredients,andusesherowntime,withanopportunitycostof$300.Hereconomicprofitseachmonthare
a. $250. b. $400. c. $550. d. $600. e. minus$350.
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7. Sunkcosts
a. shouldbeincludedwhenweighingthemarginalcostsofproductionagainstthemarginalbenefitsreceived. b. havealreadybeenincurredandcannotberecovered. c. plusvariablecostsequalthetotalcostsofproduction. d. arerelevanttofuturedecisionsandshouldbecarefullyconsidered.
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8. Theshortrun
a. isaperiodtoobriefforanyinputstobevaried. b. isaperiodthatinvolvesnofixedcosts. c. isnormallyaperiodofoneyear. d. isnoneoftheabove.
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9. Thelongrun
a. isaperiodinwhichafirmcanadjustallitsinputs. b. canvaryinlengthfromindustrytoindustry. c. isaperiodinwhichallcostsarevariablecosts. d. ischaracterizedbyalloftheabove.
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10. Thelong-runproductionperiod
a. isatimewhenallinputsarevariable. b. variesinlengthaccordingtohowcapitalgoodsarespecialized. c. islikelytobelongerforasteelmanufacturerthanforaretailerwhosellswatchesoffacartatthelocalmall. d. ischaracterizedbyalloftheabove.
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11. Whichofthefollowingmostaccuratelydescribesthelong-runperiod?
a. Thelongrunisaperiodoftimeinwhichafirmisunabletovarysomeofitsfactorsofproduction. b. Inthelongrun,afirmisabletoexpandoutputbyutilizingadditionalworkersandrawmaterials,butnotphysicalcapital. c. Thelongrunisofsufficientlengthtoallowafirmtoalteritsplantcapacityandallotherfactorsofproduction. d. Thelongrunisofsufficientlengthtoallowafirmtotransformeconomiclossesintoeconomicprofits. e. Bothaandbmostaccuratelydescribethelong-runperiod.
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12. Productionintheshortrun
a. issubjecttothelawofdiminishingmarginalproduct. b. involvessomefixedfactors. c. canbeincreasedbyemployinganotherunitofavariableinput,aslongasthemarginalproductofthatinputispositive. d. ischaracterizedbyalloftheabove. e. ischaracterizedbynoneoftheabove.
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13. Aproductionfunctionshowstherelationshipbetween
a. variableinputsandfixedinputs. b. variableinputsandoutput. c. costsandoutput. d. inputsandcosts. e. productionandsalesrevenue.
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14. Diminishingmarginalproduct
a. occursinthelongrunbutnotintheshortrun. b. occursintheshortrunbutnotinthelongrun. c. occursbothinthelongrunandtheshortrun. d. occursinneitherthelongrunnortheshortrun.
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15. Diminishingmarginalproductivityinafrozen-pizzacompanymeansthat
a. hiringadditionalworkerscausesthetotaloutputofpizzatofall. b. hiringadditionalworkersdoesnotchangethetotaloutputofpizzaproduced. c. hiringadditionalworkersaddsfewerandfewerpizzastototaloutput. d. theaveragetotalcostofproductionmustbedecreasing.
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16. Ifthemarginalproductofafirm’sonlyvariableinputisnegative,
a. itstotalproductisgrowingatadecreasingrate. b. itwillusemoreofthevariableinputuntilitsmarginalproductisagainpositive. c. itwillreduceitsuseofthevariableinput. d. itstotalproductisminimized. e. noneoftheabovewouldbetrue.
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17. Totalfixedcosts
a. donotvarywiththelevelofoutput. b. cannotbeavoidedintheshortrunwithoutgoingoutofbusiness. c. donotexistinthelongrun. d. arecharacterizedbyalloftheabove.
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18. Whichofthefollowingismostlikelyavariablecostforabusiness?
a. theloanpaymentonfundsborrowedwhenanewbuildingisconstructed b. paymentsforelectricity c. theleasepaymentonawarehouseusedbythebusiness d. theopportunitycostoftheheavyequipmentinstalledinafactory
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19. Thechangeintotalcostthatresultsfromtheproductionofoneadditionalunitofoutputiscalled
a. marginalrevenue. b. averagevariablecost. c. marginalcost. d. averagetotalcost. e. averagefixedcost.
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20. Whichshort-runcurvetypicallydeclinescontinuouslyasoutputexpands?
a. averagevariablecost b. averagetotalcost c. averagefixedcost d. marginalcost e. noneoftheabove
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21. Whichofthefollowingistrue?
a. Theshort-runATCexceedstheshort-runAVCatanygivenlevelofoutput. b. Iftheshort-runATCcurveisrising,theshort-runAVCcurveisalsorising. c. Theshort-runAFCisalwaysfallingwithincreasedoutput,whethertheshort-runMCcurveisgreaterorlessthanshort-runAFC. d. Ifshort-runMCislessthanshort-runAVC,short-runAVCisfalling. e. Alloftheabovearetrue.
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22. Whichofthefollowingisfalseintheshortrun?
a. ATCisusuallyU-shaped. b. DecliningAFCsaretheprimaryreasonATCdecreasesatlowlevelsofoutput. c. ATCincreasesathighlevelsofoutputbecauseofdiminishingmarginalproduct. d. DiminishingmarginalproductsetsinattheminimumpointofATC. e. Alloftheabovearetrueintheshortrun.
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23. Typically,whatistheshapeoftheaveragetotalcostcurveforafirmintheshortrun?
a. Typically,anaveragetotalcostcurveisU-shaped. b. Typically,anaveragetotalcostcurveconstantlyslopesupwardasoutputexpandsandeventuallyapproachesaninfinitedollaramountathighratesofoutput. c. Typically,anaveragetotalcostcurveisaverticalline. d. Typically,anaveragetotalcostcurveslopesdownwardasoutputexpandsandapproachestheX-axiswhenoutputisverylarge.
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24. Whichofthefollowingistrueintheshortrun?
a. MCequalsATCatthelowestpointofATC. b. MCequalsAVCatthelowestpointofAVC. c. WhenAVCisatitsminimumpoint,ATCisfalling. d. WhenATCisatitsminimumpoint,AVCisrising. e. Alloftheabovearetrue.
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25. Whichofthefollowingisalwaystrue?
a. Whenmarginalcostislessthanaveragetotalcost,averagetotalcostisincreasing. b. Whenaveragefixedcostisfalling,marginalcostmustbelessthanaveragefixedcost. c. Whenaveragevariablecostisfalling,marginalcostmustbegreaterthanaveragevariablecost. d. Whenmarginalcostisgreaterthanaveragetotalcost,averagetotalcostisincreasing.
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26. Whenmarginalproductisincreasing,
a. marginalcostisincreasing. b. marginalcostisdecreasing. c. averagevariablecostisincreasing. d. averagetotalcostisincreasing. e. totalcostisdecreasing.
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27. Ifataxiserviceisoperatingintheregionofdiminishingmarginalproductandmoretaxiserviceisaddedintheshortrun,whatwillhappentothemarginalcostofprovidingtheadditionalservice?
a. Itisimpossibletosayanythingaboutmarginalcostwiththeinformationprovided. b. Marginalcostwilldecrease. c. Marginalcostwillincrease. d. Marginalcostwillstaythesame.
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28. IftheBurgerHut’scitypermittooperateroseby$3,000peryear,
a. itsMCcurvewouldshiftupward. b. itsAVCcurvewouldshiftupward. c. itsATCcurvewouldshiftupward. d. itsMC,AVC,andATCcurveswouldshiftupward.
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29. Ifafirm’sATCisfallinginthelongrun,then
a. itissubjecttoeconomiesofscaleoverthatrangeofoutput. b. itissubjecttodiseconomiesofscaleoverthatrangeofoutput. c. itissubjecttoconstantreturntoscaleoverthatrangeofoutput. d. ithasreachedtheminimumefficientscaleofproduction. e. bothcanddaretrue.
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30. Inthelongrun,
a. theaveragefixedcostcurveisU-shaped. b. averagefixedcostexceedstheaveragevariablecostofproduction. c. allcostsarevariable. d. allcostsarefixed. e. noneoftheaboveiscorrect.
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31. Whenafirmexperienceseconomiesofscaleinproduction,
a. long-runaveragetotalcostdeclinesasoutputexpands. b. long-runaveragetotalcostincreasesasoutputexpands. c. marginalcostincreasesasoutputexpands. d. themarginalproductofaninputdiminisheswithincreasedutilization.
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32. Thelowestlevelofoutputatwhichafirm’sgoodsareproducedatminimumlong-runaveragetotalcostiscalled
a. thepointofzeromarginalcost. b. thepointofdiminishingreturns. c. theminimumtotalproduct. d. theminimumefficientscale. e. plantcapacity.
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PROBLEM
1. Whathappenstothecostofgrowingstrawberriesonyourownlandifahousingdeveloperoffersyouthreetimeswhatyouthoughtyourlandwasworth?
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Sincetheopportunitycost(foregonealternative)ofusingyourlandtriples,thecostofusingyourlandtogrowstrawberrieswillincrease.
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2. Asafarmer,youworkforyourselfusingyourowntractor,equipment,andfarmstructures,andyoucultivateyourownland.Whymightitbedifficulttocalculateyourprofitsfromfarming?
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Tocalculateeconomicprofit,onemustconsiderallrelevantcosts,bothexplicitandimplicit.Itmaybedifficulttocalculateyoureconomicprofitsfromfarming,sinceyoumustestimatetheimplicitopportunitycostofyourtime,tractor,equipment,farmstructuresandland.
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3. Saythatyourfirm’stotalproductcurveincludesthefollowingdata:oneworkercanproduce8unitsofoutput;twoworkers,20units;threeworkers,34units;fourworkers,50units;fiveworkers,60units;sixworkers,70units;sevenworkers,76units;eightworkers,78units;andnineworkers,77units.
a.Whatisthemarginalproductoftheseventhworker?
b.Whendoesthelawofdiminishingproductsetin?
c.Undertheseconditions,wouldyoueverchoosetoemploynineworkers?
ANS:
a. Themarginalproductoftheseventhworkerequals6unitsofoutput. b. Thelawofdiminishingproductbeginswiththefifthworkerishired. c. Afirmwouldneverchoosetohire9workers,sincethemarginalproductoftheninthworkerisnegative.
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4. Whydoesthelawofdiminishingmarginalproductimplythelawofincreasingcosts?
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Asavariablefactor,suchaslabor,addedtoagivenamountofthefixedfactor,suchascapitalorland,themarginalproductofthatfactorwilleventuallydiminish.Oncethemarginalproductbeginstodiminish,anincreasingamountofthevariablefactormustbeaddedinordertoboosttheoutputofagoodbyaparticularincrementintheshortrun.Anincreasingamountofoutputfromalternativeproductiveactivitiesmustbesacrificed(anincreasingopportunitycost).
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5. Whatislikelytohappentoyourmarginalcostswhenaddingoutputrequiresworkingbeyondaneight-hourday,ifworkersmustbepaidtime-and-a-halfwagesbeyondaneight-hourday?
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Marginalcostswillincreasebyasmuchas50%whenworkersmustbepaidtime-and-a-halfbeyondaneight-hourday.(Iflaboristheonlyvariableinput,marginalcostwillincreasebyexactly50%.)Ifworkersarelessproductiveafter8hoursofwork,marginalcostswillbeevenhigherbeyond8hoursofwork.
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6. Aone-daytickettovisittheScreamingCoastersthemeparkcosts$36,butyoucanalsogetatwo-consecutive-dayticketfor$40.Whatistheaveragecostperdayforthetwo-dayticket?Whatisthemarginalcostofthesecondconsecutiveday?
ANS:
Theaveragecostperdayequals$20forthetwo-daypass.Themarginalcostoftheseconddayis$4.
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7. Asamovieexhibitor,youcanchoosebetweenpayingaflatfeeof$5,000toshowamovieforaweekandpayingafeeof$2percustomer.Willyourchoiceaffectyourfixedandvariablecosts?How?
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Yourchoicewillaffectyourfixedandvariablecosts.Ifyouchoosetopaytheflatfee,yourfixedcostsforthefilmwillequal$5,000fortheweek.Yourvariablecostsassociatedwiththeleasingofthefilmwouldthenequalzero.Ifyouchoosetopay$2percustomer,thenthecostsassociatedwithleasingthefilmwillbeallvariable.
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8. Ifyouruniversitypayslecturenotetakers$20perhourtotakenotesinyoureconomicsclassandthensellssubscriptionsfor$15perstudent,isthecostofthelecturenotetakerafixedorvariablecostofsellinganadditionalsubscription?
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Thenotetaker''swageisafixedcost,whichdoesnotvarywiththenumberofsubscriptionssold.
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9. Howmightauniversitycafeteriacookingfor400studentsratherthanfor3studentsbesubjecttoeconomiesofscaleinthelongrun?
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Inthelongrun,afoodservicecompanycanvarythesizeofthekitchenanditsfoodpreparationequipment.Whencookingforalargenumberofstudents,foodpreparerscanutilizemassproductiontechniquestocooklargequantitiesoffoodateachmeal.Foodpreparerscanspecializeatparticularculinarytasksandtherebybecomemoreproficientatthem.Asaresult,theaveragetotalcostofproducingmealsislikelytodecreaseinthelongrunasthenumberofstudentsservedincreases.
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10. FillintherestoftheproductionfunctionforCandy’sCandiesfromtheinformationprovided.
Labor(workers) TotalProduct(pounds) MarginalProduct(pounds) 0 0 1 20 2 44 3 62 4 12 5 6 6 78
a. Candy’sCandiesbeginstoexperiencediminishingmarginalproductwithwhichworker? b. DoesCandy’sCandieseverexperiencenegativemarginalproduct?Ifso,withtheadditionofwhichworker?
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Labor(workers) TotalProduct(pounds) MarginalProduct(pounds) 0 0 1 20 20 2 44 24 3 62 18 4 74 12 5 80 6 6 78 -2
a. Candy’sCandiesbeginstoexperiencediminishingmarginalproductwiththethirdworker,thefirstoneforwhichmarginalproductbeginstofall. b. Candy’sCandiesexperiencesanegativemarginalproductbeginningwiththesixthworker.
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11. Drawatypicallyshapedtotalproductcurveandthemarginalproductcurvederivedfromit,andindicatetherangesofincreasing,diminishing,andnegativemarginalproduct.
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12. Illustratehowtheshapeofthemarginalproductcurverelatestotheshapeofthemarginalcostcurve.
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13. Usethegraphtoanswerthefollowingquestions.
a.CurveArepresentswhichcostcurve?
b.CurveBrepresentswhichcostcurve?
c.CurveCrepresentswhichcostcurve?
d.CurveDrepresentswhichcostcurve?
e.WhymustcurveDpassthroughtheminimumpointsofbothcurveBandcurveC?
f.WhatsignificancedoesthepointwherecurveAintersectscurveDhave?
ANS:
a. AverageFixedCost(AFC). b. AverageVariableCost(AVC). c. AverageTotalCost(ATC). d. MarginalCost(MC). e. WhereMCislessthanAVC,AVCisfalling,whenMCequalsAVC,AVCdoesnotchange,andwhenMCexceedsAVC,AVCisrising,sotheintersectionofMCandAVCisattheminimumpointofAVC;whereMCislessthanATC,ATCisfalling,whenMCequalsATC,ATCdoesnotchange,andwhenMCexceedsATC,ATCisrising,sotheintersectionofMCandATCisattheminimumpointofATC. f. ThepointwhereMCequalsAFChasnoeconomicsignificance.
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14. FillintherestofthecostfunctionforBob’sBowlingBalls.
Total Total Total Average Average Average Marginal Output FixedCosts VariableCosts Costs FixedCost VariableCost TotalCost Cost 1 200 60 2 100 3 120 4 128 5 180 6 252 7 316 8 436
ANS:
Total Total Total Average Average Average Marginal Output FixedCosts VariableCosts Costs FixedCost VariableCost TotalCost Cost 1 200 60 260 200 60 260 60 2 200 100 300 100 50 150 40 3 200 120 320 66.66 40 106.66 20 4 200 128 328 50 32 82 8 5 200 180 380 40 36 76 52 6 200 252 452 33.33 42 75.33 72 7 200 316 516 28.57 45.14 73.71 64 8 200 436 636 25 54.50 79.50 120
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