FINAL EXAM 3: The Theory and Estimation of Cost

Multiple-Choice Questions

1) To an Economist, total costs include:

A) Explicit, but not implicit costs
B) Implicit, but not explicit costs
C) Explicit and implicit costs
D) Neither explicit nor implicit costs

2) Economists consider which of the following costs to be irrelevant to a

short-run business
decision?
A) opportunity cost B) out-of-pocket cost
C) historical cost D) replacement cost

3) Costs of production that change with the rate of output are:

A) Sunk costs
B) Opportunity costs
C) Fixed costs
D) Variable costs

4) Changes in the Short Run total costs result from changes in only:
A) Variable costs
B) Fixed costs
C) Zero
D) Total fixed costs

5) Economic profit equals accounting profit minus

A) explicit costs.
B) implicit costs
C) fixed costs
D) variable costs.

6) Which of the following is most likely a fixed cost?

A) Expenditures for raw materials
B) Wages for unskilled labor
C) Fuel cost
D) Property Taxes

7) When a firm increased its output by unit, its AFC decreased. This is an
indication that
A) the law of diminishing returns has taken effect.
B) MC < AFC.
C) AVC < AFC.
D) the firm is spreading out its total fixed cost.
8) Which of the following relationships is correct?

A) When marginal product starts to decrease, marginal cost starts to

decrease.
B) When marginal cost starts to increase, average cost starts to increase.
C) When marginal cost starts to increase, average variable cost starts to
increase.
D) When marginal product starts to decrease, marginal cost starts to
increase.

9) The relationship between MC and AC can best be described as follows:

A) when AC increases, MC starts to increase.
B) when MC increases, AC starts to increase.
C) when MC decreases, AC decreases.
D) when MC exceeds AC, AC starts to increase.

10) The law of diminishing returns begins first to affect a firm's short-run cost
structure when
A) average variable cost begins to increase.
B) marginal cost begins to increase.
C) average cost begins to increase.
D) average fixed cost begins to decrease.

11) When a firm increased its output by one unit, its AC rose from $45 to
$50. This implies that its MC is
A) $5.
B) between $45 and $50.
C) greater than $50.
D) Cannot be determined from the above information.

12) When a firm's MC curve shifts to the right, it implies that

A) new firms are entering the market.
B) labor productivity is decreasing.
C) labor productivity is increasing.
D) the firm's overhead costs are decreasing.

13) MC increases because

A) MC naturally increases as firm nears capacity.
B) labor is paid overtime wages when volume increases.
C) in the short run, MC always increases.
D) the law of diminishing returns takes effect.

14) The marginal cost will intersect the average variable cost curve
A) when the average variable cost curve is rising.
B) where average variable cost curve equals price.
 C) at the minimum point of the average variable cost curve.
D) the two will never intersect.

15) Which of the following cost functions will exhibit both decreasing and
increasing marginal costs?
A) a cubic cost function B) a quadratic cost function
C) a linear cost function D) All of the above.

16) When a firm increased its output by one unit, its AC decreased. This
implies that
A) MC < AC.
B) MC = AC.
C) MC < AFC.
D) the law of diminishing returns has not yet taken effect.

17) The main factor that explains the difference between accounting cost
and economic cost is
A) opportunity cost.
B) fixed cost.
C) variable cost.
D) All of the above help to explain the difference.

18) When a firm experiences increasing returns to scale

A) its AFC will decrease. B) its AFC will increase.
C) its AC will increase. D) its AC will decrease.

19). In the long run:

A) Fixed costs tend to be greater than variable costs
B) Variable costs tend to be greater than fixed costs
C) All costs are fixed cots
D) All costs are variable costs

20) Long-run cost functions are estimated using

A) time-series regression analysis. B) cross-sectional regression
analysis.
C) cost accounting data. D) None of the above.

Analytical Question

If a production function is given by the equation: Q = 12X + 10X2 - X3, where

Q = Output and X = Input, calculate the equations for average product.

Reference:
Chapter 7 - The Theory and Estimation of Cost
Keat, Paul and Philip K.Y. Young (2003). Managerial Economics: Economic
Tools for Today’s Decision Makers.