Production & Costs of ProductionTrue or false : 1) Normal profit is an implicit cost. 3) In the short run. 2) When economic profits equal zero. beyond some point marginal product will diminish. but falling. the total product curve increases at a decreasing rate. 12) A major factor explaining economies of scale is increased specialization of labor. the size (or capacity) of a firm's plant is variable. the firm is experiencing diseconomies of scale. 9) The short-run marginal-cost curve is upward-sloping because of the law of diminishing marginal returns. . marginal returns for an input. 7) When the marginal product of the variable input begins to decrease. total product also begins to decrease. marginal product is positive. but diminishing. 4) The law of diminishing returns states that as successive amounts of a variable resource are added to a fixed resource. 5) The law of diminishing marginal utility explains why short-run production costs increase directly with a firm's level of output. 11) If a firm increases all its inputs by 10 percent and its output increases by 15 percent. normal profits are negative or equal zero. 10) Marginal product is highest where marginal cost is lowest. 8) When total product is increasing at a decreasing rate. 6) Over the range of positive. C) the amount of all resources can be varied. output: A) is absolutely fixed.Multiple choice: (1) Accounting profits: A) are economic profits. B) the long run always refers to a time period of one year or longer C) in the short run. B) economic profits. D) in the long run. (2) An industry is expected to expand if firms in the industry are earning: A) normal profits. D) equal the difference between total revenues and the sum of implicit and explicit costs. C) determined by subtracting total costs from total revenues. (6) The long run is a period of time for which: A) all resources are fixed. B) identical to economic profits. (5) The main difference between the short run and the long run is that: A) firms earn zero profits in the long run. C) equal the difference between total revenues and explicit costs. (3) Normal profits are: A) the profits reported by accountants on a firm's annual financial statement. (4) In the short run. D) marginal product begins to fall at an increasing rate. C) accounting profits. B) can vary as the result of using a fixed amount of plant and equipment more or less intensively. (7) The range of diminishing marginal productivity begins when: A) total product begins to fall. only one variable can be fixed. . C) may be altered by varying the size of plant and equipment which now exist in the industry. C) marginal product reaches its maximum. B) the level of output is fixed. D) can vary as the result of changing the size of existing plants and by new firms entering or leaving the industry. D) the size of the production plant is fixed. D) considered an implicit cost by economists. D) profits that exactly cover all of the firms' opportunity costs. B) average product reaches its maximum. one or more inputs is fixed. B) are similar to pure economic rents. C) eventually. (9) Which statement best illustrates the law of diminishing returns? A) The average total cost of the last unit of a resource used is less than the average total cost of the previous resource used.(8) The law of diminishing returns implies: A) the more hours you spend studying the less you will know. total product begins to decrease at the point where the: A) average product of labor is zero. (12) In the short run. C) average product of labor is negative. the more you will learn with each added hour. the less you will learn with each added hour. C) total output divided by the units of a variable resource. B) The marginal product of the last unit of a resource used is less than the marginal product of the previous resource used. (11) Average product is the: A) level of output at which total product increases. D) average product of labor is declining. B) marginal product of labor is zero. C) change in the cost of a variable resource. B) your understanding will be increased by decreasing your marginal study time. (10) The marginal product of labor shows the change in total product resulting from a: A) one-unit increase in the quantity of a particular resource used. D) maximum level of output with one variable resource and other fixed resources. holding constant other resources. B) level of output at which total product decreases. B) one-unit increase in the quantity of a particular resource used. letting other resources vary. the more hours you spend studying per day. D) The marginal cost of the last unit of a resource used is less than the marginal cost of the previous resource used. D) the more hours you spend studying per day. D) change in the cost of a fixed resource. C) The average product of the last unit of a resource used is less than the average product of the previous resource used. . (15) Refer to the above table. There are increasing marginal returns through the: A) first unit of variable input. C) seventh unit of input is added. D) ninth unit of input is added. C) third unit of variable input. C) average product of labor is increasing.4 D) 8 and the average product is 10.(13) When the total product curve is falling.0 (18) After what point in the graph does the law of diminishing returns set in? A) point A B) point B C) point C D) point D . There are negative marginal returns when the: A) fifth unit of input is added.4 B) 5 and the average product is 5. ** The next question(s) are based on the following table that provides information on the production of a product that requires one variable input. D) average product of labor must be negative. D) fourth unit of input. the marginal product is: A) 5 and the average product is 8. B) second unit of variable input. C) third unit of input. (17) Refer to the above table. Input 0 1 2 Total product 0 5 2 0 3 3 2 4 4 2 5 5 0 6 5 5 7 5 8 8 5 8 9 56 (14) Refer to the above table.0 C) 8 and the average product is 8. With the addition of the first unit of input. D) fourth unit of variable input. B) marginal product of labor is negative. B) second unit of input. the: A) marginal product of labor is zero. B) sixth unit of input is added. Diminishing returns set in with the addition of the: A) first unit of input. (16) Refer to the above table. d 750 D) k.030 and average fixed costs are k.d 12.d 100 C) k.d 97.d 10. then total fixed costs are: A) k. C) average variable cost will exceed average fixed cost by the level of average total cost.d 1. . (25) Marginal cost can be defined as the: A) change in fixed cost resulting from one more unit of production.d 93.50 and average variable cost is k. D) implicit to a competitive firm. D) defined as the change in total cost resulting from the production of an additional unit of output. B) difference between fixed and variable cost at any level of output.(19) Variable costs are: A) sunk costs. D) difference between price and average total cost at the profitmaximizing level of output. (20) Fixed costs are those costs which are: A) subject to diminishing marginal productivity. average fixed cost is k. B) embodied in the calculation of marginal cost. then total cost at this output level is: A) k. total costs are k. B) marginal cost will exceed average variable cost by the level of average fixed cost.d 1040 (23) If you know that with 8 units of output. C) independent of the rate of output. D) average total cost will exceed average variable cost by the level of average fixed cost.d 880 (24) At any level of output: A) average variable cost will exceed average total cost in the short run. C) costs that change with the level of production.d 81. C) amount which one more unit of output adds to total cost. (21) Which is the best example of a fixed cost of production to a firm? A) depreciation of capital B) wages paid to workers C) electricity charges D) advertising (22) When a firm produces 10 units of output.78 C) k.d1020 D) k.25.d5 B) k.75 B) k. B) multiplied by fixed costs. d 10 C) k.50.d 12.d 16.d 150.d 600.67 D) k. total variable cost is k. and total product is 4 units. B) average fixed cost is k. D) average variable cost is k. .d 97 D) k. C) remains constant. then: A) marginal cost is k.33 B) k.d 25 D) k.d 38 (29) Refer to the above table.33 B) k. (32) If average variable cost is k.d 12.d 73 (27) Refer to the above table. a firm has average total costs of k.d 10 B) k.d 10 C) k.33 C) k. Its output is: A) 200 units B) 400 units C) 800 units D) 1600 units (34) As output increases.d 100.d 2. C) average total cost is k. The average total cost of producing 3 units of output is: A) k.d 3 and average variable costs of k. The average variable cost of producing the first unit of output is: A) k. B) decrease.d 100 (33) With fixed costs of k.67 D) k. The average fixed cost for producing 3 units of output is: A) k. The marginal cost of producing the sixth unit of output is: A) k.d 91 B) k.d 10 B) k.d 50.d 100.d 10 B) k. average fixed cost: A) increase.d 30 D) Information not sufficient (31) If you know that total fixed cost is k.Output 0 Total Cost 1 0 1 2 0 2 2 8 3 3 8 4 5 3 5 7 3 6 98 (26) Refer to the above table.6 C) k. The total variable cost of producing 5 units is: A) k. then average total cost at this output level is: A) k.d 94 C) k.d 14.d 38 (28) Refer to the above table.d 20 C) k.d 9.d 74 and total fixed cost is k.d 400.d 3.d 200.d 100 at 5 units of output.d 63 D) k.d 98 (30) Refer to the above table. D) first increase and then decrease. . B) marginal cost must be below average variable cost. D) average variable costs are below average fixed costs. then this indicates that: A) average total costs are at a maximum. D) marginal cost must be decreasing. B) average fixed costs are constant. (36) If the short-run average variable cost of production for a firm is decreasing.(35) The short-run marginal-cost (MC) curve eventually rises because of: A) diseconomies of scale. C) marginal costs are above average variable costs. C) diminishing marginal returns. (39) If the short-run average variable costs of production for a firm are rising. B) both average total cost and average variable cost are decreasing C) both average total cost and average variable cost are increasing. (40) The area represented by the rectangular (abcd) in the graph below equals A) B) C) D) total cost for producing (ad) variable cost for producing (ad) average total cost for producing (ad) average variable cost for producing (ad) . (37) At which point of the graph is the MP the greatest? A) B) C) D) point A point B point C point D (38) If marginal cost is below average variable cost: A) average total cost is increasing but average variable cost is decreasing. then it follows that: A) average variable cost must be above average fixed cost. B) increasing fixed costs. D) average variable cost is less than average fixed cost. C) average fixed cost must be constant. D) increasing marginal productivity of the variable inputs. D) the average product of labor is at a maximum. (46) When average variable cost is at a minimum: A) marginal cost is at a maximum. then which is likely to be true? A) Average total cost is increasing. B) the average product of labor is at a minimum.**Answer the next three questions on the basis of the graph below : (41) Variable cost when producing (hg) equals : A) hfeg B) hbag C) bacd D) hdcg (42) Average variable cost when producing (hg) equals : A) ge B) ac C) gc D) ec (43) The distance (ca) represents : A) average total cost when producing (hg) B) average variable cost when producing (hg) C) average fixed cost when producing (hg) D) none of the above (44) If marginal cost exceeds average total cost in the short run. C) TFC is increasing. (45) The firm's short-run marginal-cost curve is increasing when: A) MP is increasing. D) Marginal cost is less than average variable cost. B) Average variable cost is decreasing. C) the marginal product of labor is at a minimum. D) AFC is decreasing. . C) Average total cost is less than average variable cost. B) MP is decreasing. B) constant returns to scale. this is due to: A) declining average fixed costs.** Based on the graph below. B) the law of diminishing returns. this is known as: A) economies of scale.d 290 (49) Average fixed cost for producing 450 units : A) k. C) diseconomies of scale.d 90 B) D) k. .d 200 D) k.d 0.d 200 (48) Total cost for producing 200 units is : A) k.d 260 B) k.d 75 C) k.200 C) k. D) a violation of the law of diminishing returns.d 2.d 120 k.2 D) cannot be measured (50) If long-run average total cost decreases as output increases.d 250 C) k. D) externalities . (51) When a firm doubles its inputs and finds that its output has more than doubled.d 2 B) k. answer the next three questions : (47) Fixed costs are equal to : A) k. C) economies of scale. Complete the following table . What is the average total cost for producing 6 units ? Find the fixed cost for producing the 5th unit .d 7 daily .d 10 daily. What is the total product when the factory employs 4 workers ? What is the total cost for producing 60 units ? What is the marginal cost for producing the 25th unit ? (2) Suppose that fixed cost = k. what is the total cost for producing 9 units ? .d 30 .Problem sets : (1) A factory has the following resources and the costs corseponding to its use : land rental costs k. If marginal cost for both the 8th and 9th units equals k. No.d 12 per unit . labor costs k. and the production and costs table is as follows : Total product Variable cost (TP) (VC) 1 7 2 13 3 18 4 24 5 31 6 39 7 48 a) b) c) d) Find the marginal cost of the 4th unit of production . of Total product Marginal product Average product Labor (L) (TP) (MP) (AP) 0 0 1 10 10 2 25 3 12 4 10 5 8 6 5 7 3 a) b) c) d) Find the marginal product for the second laborer . of Workers (L) 0 1 2 3 4 5 6 7 Total product Fixed cost (TP) (FC) – k.(3) Suppose you have the following data : No. b) Calculate the total cost when producing 50 units . . Calculate the average total cost at 4 units . given that wages are k.d 0 5 15 37.d 20 per unit of labor . c) What is the average fixed cost of employing 6 workers ? (4) The following data represent the cost structure for a dairy products plant : Quantity produce d 0 1 2 3 4 5 6 7 a) b) c) d) Total cost (k. Find the variable cost of producing 6 units .5 50 61 69 76 15 a) Calculate the marginal product of the 4th worker . Calculate the marginal cost of the 6th unit .d) 20 28 35 41 48 56 65 75 Find the fixed cost of producing 5 units . Labor Total product Capital cost units (TP) ( k.d____ k.d____ 1 ____ k.(5) The following table represent levels of production at different levels of labor given that the price of a unit of labor is k.d____ ––– k.d____ k.d12 ____ ____ 10 ____ ____ 12 ____ ____ 14 ________ . Total product TFC AFC TVC 0 k.d____ ____ 2 ____ 12 ____ 3 ____ ____ ____ 4 ____ ____ ____ AVC TC MC ––– k.d ) 0 0 100 1 25 2 75 3 175 4 250 5 305 6 345 a) What is the average fixed cost of producing 305 units ? b) What is the average variable cost of producing 175 units ? c) At which unit of labor the average variable cost reaches a minimum ? (6) Complete the following short-run cost table using the information provided.d 25 . . Enter these figures in the table. b) Now determine the marginal cost of the firm’s product as the firm increases its output.d20. c) Describe the relationship between marginal and average product. d) Describe the relationship between the marginal product of labor and the marginal cost of the firm’s product. c) If labor is the only variable input. Compute the total cost of labor for each quantity of labor the firm might employ. and enter these figures in the table.(7) The table below shows the total production of a firm as the quantity of labor employed increases. and the average product of labor. the marginal product of labor. a) Assume each unit of labor costs the firm k. the output of the firm. Units Total of Labor product 0 0 1 40 2 100 3 165 4 200 5 225 6 240 7 245 8 240 Marginal product of labor ––– ______ ______ ______ ______ ______ ______ ______ ______ Average product of labor ––– ______ ______ ______ ______ ______ ______ ______ ______ a) At what levels are there increasing returns to labor and at what levels are there decreasing returns to labor? b) Describe the relationship between the total product and marginal product. Find the average variable cost of the firm’s product. Enter these figures in the table. The quantities of all other resources employed are constant. The table below shows the relationships between the amount of labor employed. (8) Assume that a firm has a plant of fixed size and that it can vary its output only by varying the amount of labor it employs. the total labor cost and total variable cost are equal. Compute the marginal and average products and enter them in the table. marginal product.00 k.28 _____ _____ _____ 8 76 4 9.80 _____ _____ _____ Essay Questions : • • • • • Why is it important to distinguish between explicit and implicit costs? What is the relationship between total product. and average product shown by the law of diminishing returns? What is the relationship between marginal cost and marginal product? What factors explain economies of scale? What is the difference between the short run and the long run? .e) Describe the relationship between the average product of labor and the average variable cost.50 _____ _____ _____ 9 78 2 8.00 _____ _____ _____ 7 72 6 10.66 _____ _____ _____ 10 78 0 7.00 _____ _____ _____ 3 36 14 12.00 _____ _____ _____ 5 58 10 11. Quantity Marginal Average Total Average of labor Total product product variable Marginal variable employed output of labor of labor cost cost cost 0 0 ––– ––– ––– ––– 1 10 10 10.d_____ k.00 _____ _____ _____ 4 48 12 12.d_____ k.60 _____ _____ _____ 6 66 8 11.d_____ 2 22 12 11.