102:B2

study questions for chapters 8,10,11

S. Kadambe

MULTIPLE CHOICE QUESTIONS

Follow the same instructions as given for other study questions

Chapter 10
Section 10.1
1.

Mr. Sweet opened a candy store. He rented a building for $30,000 a year. During the first year of operation, Sweet
paid $40,000 to his employees, $10,000 for utilities, and $20,000 for goods he bought from other firms. His total
revenue was $135,000. Sweet's best alternative to running this candy store is to work for Wal-Mart as a sales
associate for $15,000 a year. What is Sweet's economic profit?
1) _______

A) zero B) $20,000

C) $35,000

D) -$20,000

2) A normal profit for a self-employed entrepreneur is

I. an opportunity cost.
II.
part of the implicit rental rate of the funds invested in the business.
A) only I

B) only II

2) _______

C) both I and II D) neither I nor II

3) An electrician quits her current job, which pays $40,000 per year. She can take a job with another firm for $45,000 per
year or work for herself. The opportunity cost of working for herself is
3) _______
A) $45,000.

B) $5,000.

C) $85,000.

D) $40,000.

4) A normal profit is
4) _______
A) the profit a firm makes each year.
B) part of the implicit rental rate of capital.
C) the average return for entrepreneurship.
D) the revenue remaining after all opportunity costs have been paid.
5) Which of the following are two components of the opportunity cost of using capital already owned by the firm? 5)
_______
A) economic profit and normal profit
B) implicit rental rate and economic profit
C) economic depreciation and forgone interest
D) explicit rental rate and economic costs
6) Mr. Sweet opened a candy store. He rented a building for $30,000 a year. During the first year of operation, Sweet paid
$40,000 to his employees, $10,000 for utilities, and $20,000 for goods he bought from other firms. His total revenue was
$135,000. Sweet's best alternative to running this candy store is to work for Wal-Mart as a sales associate for $15,000 a year.
What is Sweet's total opportunity cost? 6) _______
A) $100,000

B) $115,000

C) $15,000

D) $135,000

7) Ed is a freelance writer who could work for a newspaper at $25,000 a year but instead works for himself for $41,000 a
year. His only business expenses are $1,000 for writing materials and $12,000 for rent. Ed's normal profit is $1,000. Ed's

economic profit from working as a freelance writer is

A) $1,000.

Method
T-1
T-2
T-3
T-4

B) $25,000.

C) $15,000.

Labor required
(person-hours)
200
150
150
100

7) _______

D) $2,000.

Capital required
(machine-hours)
100
150
130
200

8) Section 10.2
The table below shows four alternative techniques for assembling a car. The cost of labor is $20 per hour, and the cost of
capital is $10 per hour. Which of the four techniques for assembling a car is economically efficient?
8) _______
A) T-1 B) T-2 C) T-3 D) T-4
9) A firm that is technologically efficient 9) _______
A) must be economically efficient, but a firm that is economically efficient is not always technologically efficient.
B) is not always economically efficient, but a firm that is economically efficient must always be technologically efficient.
C) is not always economically efficient, and a firm that is economically efficient is not always technologically efficient.
D) must be economically efficient, and a firm that is economically efficient must always be technologically efficient.
10) Which of the following is correct?
10) ______
A) If a firm is technologically efficient, it is always producing at the lowest costs of production.
B) If a firm is economically efficient, it is always technologically efficient.
C) If a firm is technologically efficient, it is always economically efficient.
D) None of the above answers is correct.
11) Which of the following is a correct statement?
11) ______
A) Technological efficiency depends only on production methods, while economic efficiency depends on the costs of
resources.
B) Technological efficiency depends on the costs of resources while economic efficiency depends on only production
methods.
C) Economic efficiency definitely occurs when a firm cannot increase production without using more resources.
D) all of the above

Method
T-1
T-2
T-3
T-4

Labor required
(person-hours)
200
150
150
100

Capital required
(machine-hours)
100
150
130
200

12) The table below shows four alternative techniques for assembling a car. Which of the four techniques for assembling a
car cannot be economically efficient with any input prices ?
12) ______
A) T-1 B) T-2 C) T-3 D) T-4

13) Which of the following is true?

13) ______
A) If production is technologically efficient then it must be economically efficient.
B) Economic efficiency depends only on what is feasible.
C) Economic efficiency occurs if the maximum feasible amount of output is achieved from a given quantity of inputs.
D) None of the above statements are correct.

Method
T-1
T-2
T-3
T-4

Labor required
(person-hours)
200
150
150
100

Capital required
(machine-hours)
100
150
130
200

14) The table below shows four alternative techniques for assembling a car. The cost of labor is $20 per hour, and the cost
of capital is $10 per hour. Which of the four techniques for assembling a car is not technologically efficient?
14)
______
A) T-1 B) T-2 C) T-3 D) T-4
15) Section 10.3
An advantage of the corporate form of organization is that

15) ______

A) a corporation cannot go bankrupt.

B) owners have unlimited liability.
C) owners have limited liability.
D) the management structure is usually simple.
16) By making most of its employees owners of the company, United Airlines attempted to
A) address the principal-agent problem between the workers and managers.
B) change its business organization from a corporation to a partnership.
C) cope with the unlimited liability problem.
D) increase the role of the command system in managing the firm.

16) ______

17) Which of the following types of business organization have limited liability?
I. proprietorship
II. partnership
III.
corporation
17) ______
A) III only

B) II, III only

C) I, II, III

D) I, II only

18) A command system is a method of coordinating a firm's productive resources that uses
A) a managerial hierarchy.
B) government regulations.
C) discipline and punishment. D) survival of the fittest.

18) ______

19) Which of the following forms of business organization is likely to suffer most from the principal agent problem
between the owners and managers of the business?
19) ______
A) partnerships

B) corporations
C) proprietorships
D) All are equally likely to suffer from the principal-agent problem.
20) A chief purpose of long-term contracts is to improve agents' 20) ______
A) information. B) security.
C) control over principals.
D) incentives.
21) A form of business whose profits are taxed twice is 21) ______
A) a corporation.
B) a partnership.
C) a proprietorship.
D) either a proprietorship or a partnership, depending on other information.
22) Section 10.4
If an industry is monopolized by one firm, the four-firm concentration ratio equals
A) 100 percent. B) 1 percent.

C) 40 percent.

22) ______

D) 25 percent.

23) In monopolistic competition, there are ________.

23) ______
A) many firms, each selling an identical product
B) many firms selling products for which no good substitutes exist
C) many firms selling similar but slightly different products
D) a small number of firms, each selling an identical product
24) The market structure in which a large number of firms compete by making similar but slightly different products is
called 24) ______
A) monopoly.
C) oligopoly.

Company
A
B
C
D
E
F
G
H
I
J
K

B) perfect competition.
D) monopolistic competition.

Sales
(millions of dollars)
120
89
531
452
269
125
25
89
155
69
85

25) The table above shows sales of the firms in the pet food industry. What type of market is this? 25) ______
A) monopoly B) oligopoly
C) monopolistic competition
D) perfect competition

Company
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q
R
S
T

Sales
(millions of dollars)
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100

26) The table above lists the market shares of the twenty makers of personal computers. Based upon the HerfindahlHirschman Index for this industry, the Justice Department would26) ______
A) be against any two firms merging.
B) consider the market oligopolistic.
C) regard the industry as highly concentrated.
D) regard the industry as competitive.
27) The air travel market, which is dominated by a few large firms, is an example of
A) an oligopolistic market.
B) a monopolistically competitive market.
C) a perfectly competitive market.
D) a monopoly market.

27) ______

28) Section 10.5

A firm finds that it can produce several different goods at a lower average cost by using some of the same production
facilities than it could if it produced each of the goods with separate production facilities. This firm is
28) ______
A) gaining economies of scale. B) gaining economies of scope.
C) incurring diseconomies of scale.
D) gaining economies of team production.
29) Firms are often more efficient than markets as coordinators of economic activity because
A) firms don't rely on economies of scale while markets do.
B) markets cannot coordinate production.
C) firm coordination is always more economically efficient than market coordination.
D) firms can achieve lower transaction costs.

29) ______

30) Which of the following can lead to a firm being more efficient that a market? A firm can have
I. economies of scale.
II. economies of scope.
III.
lower transactions costs. 30) ______
A) I, II and III

B) I and II

C) III only

D) II and III

31) When Fatz confectionery can lower the cost of manufacturing and packaging a pound of candy by doubling the
quantity manufactured and packaged each day, it will achieve
31) ______
A) economies of team production.
B) economies of scale.
C) economies of scope. D) all of the above
32) Economies of scope exist when
32) ______
A) a firm hires specialized resources to produce a range of goods and services.
B) the total cost of production falls as the output increases.
C) the cost of producing a unit of a good falls as its output increases.
D) a firm uses outsourcing to produce a good or service.
33) Taco Bell produces both tacos and burritos because when it does so, Taco Bell experiences
A) increasing normal profit.
B) decreasing scope of costs.
C) economies of scope. D) economies of scale.

33) ______

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
34) Two university graduates, Bill and Steve, worked for an advertising agency at an annual salary of $40,000 each for 3
years after they graduated. Then, they decided to quit their jobs and start a partnership that designs and builds Web sites.
They rented an office for $12,000 a year and bought capital for $30,000. To pay for the equipment, Bill and Steve borrowed
money from a bank at an annual interest rate of 6 percent. During their first year of operation, the partners' total revenue
was $100,000. The market value of their capital at the end of the year was $20,000. If Bill and Steve do not design Web
pages, their best alternatives are to return to their previous job.
a) What is the firm's economic depreciation?
b) What are the partnership's costs?
c) What is the firm's economic profit in the first year of operation?

Technique
A
B
C
D
E

Labor
(hours)
120
80
60
30
20

Capital
(units)
10
21
20
22
30

35) FasterChip, Inc. is considering five alternative techniques for assembling personal computers. The table shows the
amounts of labor and capital required by each of these techniques to make 10 computers a day. Labor costs $15 an hour
and capital costs $100 a unit.
a) Which techniques are technologically efficient and which are not? Explain your answer.
b) Which technique is economically efficient? Explain.
c) If FasterChip uses its plant in Mexico, it can lower the labor cost to $10 an hour. Which technique will the company
use in Mexico? Explain.

CHAPTER 8 QUESTIONS
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
36) Section 8.1
Utility is best defined as

36) ______

A) the satisfaction from consuming a good.

B) the price of a good.
C) the practical usefulness of a good.
D) the amount one is willing to pay for a good.
37) According to the principle of diminishing marginal utility, as the quantity of a good or service consumed increases,
total utility
37) ______
A) decreases. B) increases. but at a decreasing rate.
C) is unchanging.
D) is zero.
38) "I really enjoy watching movies. The first one is best. After that I still enjoy movies but the last one is not as much fun
to watch as the one before it." This statement reflects the 38) ______
A) principle of diminishing marginal utility.
B) principle of diminishing total utility.
C) law of supply.
D) principle of increasing marginal utility.

Quantity
(boxes)
0
1
2
3
4

Total
utility
0
30
50
66
?

Marginal utility
X
30
20
16
12

39) The table above gives Andy's utility from popcorn. Andy's total utility from four boxes of popcorn is 39) ______
A) 70. B) 82.

Quantity
0
1
2
3
4
5
6

C) 66.

D) 78.

Fritos
Total
utility
0
40
75
105
130
150
165

Quantity
0
1
2
3
4
5
6

Fruit drinks
Total
utility
0
50
95
135
170
200
225

40) The table above shows the total utility from the two goods Freddy likes to consume. Suppose that Freddy has already
eaten 5 bags of Fritos. If he consumes one more bag, his marginal utility will
40) ______

A) equal 40.
C) equal 35.

B) equal 15.
D) depend on the price of the extra bag.

Magazines
Marginal
utility
50
42
34
26
18
10
4

Quantity
1
2
3
4
5
6
7

Quantity
8
10
12
14
16
18
20

Chocolate bars
Marginal
utility
26
23
20
17
14
11
8

41) Section 8.2

Sonya's budget for magazines and chocolate bars is $50. Her marginal utility from these goods is shown in the table above.
The price of a magazine is $5 and the price of a chocolate bar is $2.50. Sonya currently buys 3 magazines and 14 chocolate
bars. To maximize her utility, she should 41) ______
A) buy more chocolate bars and fewer magazines.
B) buy more magazines and fewer chocolate bars.
C) buy more of both goods.
D) stay with the current combination of goods.
42) Katie has a choice of spending $6.00 for another hamburger, which has a marginal utility of 30, or $9.00 for another
pizza. For her to choose the pizza, it would have to have a marginal utility of at least
42) ______
A) 31. B) 30.
C) 46. use MU/P equality rule D) 9.

Quantity
3
4
5
6
7
8
9

Marginal utility of
DVD rentals
100
90
80
70
60
50
40

Marginal utility of
movies
152
150
147
143
140
135
128

43) Becky decides to spend $50 per month on DVD rentals and movie tickets. Her marginal utility schedules from these
two goods are shown in the table above. The price of a DVD rental is $2.50, and the price of a movie ticket is $5. Becky
maximizes her utility if she rents ________ DVDs per month and buys ________ movie tickets per month. 43) ______
A) 5; 7 B) 4; 8 C) 8; 6 D) 6; 7
44) Jenny buys sodas and popcorn. Sodas sell for $1 and popcorn sells for $2 a bag. Currently she is in consumer

equilibrium, with the marginal utility from her last dollar spent on popcorn equal to 100 units of utility. The marginal
utility from her last dollar spent on sodas is
44) ______
A) 20 units of utility.
B) 100 units of utility.
C) 50 units of utility. Apply MU/P equality rule
D) 30 units of utility.
45) When a consumer spends all of his or her income and consumes a bundle of goods such that the marginal utility per
dollar from all goods is equal, then the 45) ______
A) consumer is in his or her consumption equilibrium.
B) consumer's total utility is maximized.
C) marginal utilities for each good are maximized.
D) Both answers A and B are correct.
46) Which of the following occur when a person maximizes utility?
I. The marginal utility of each good bought is equal.
II. The highest level of utility is attained.
III.
All of a person's budget is spent.
46) ______
A) I and III

B) II and III

C) I and II

D) I, II and III

47) As long as the marginal utility per dollar from pizza is greater than the marginal utility per dollar from soda, then to
maximize utility a consumer will buy 47) ______
A) less pizza and less soda.
B) equal amounts of pizza and soda.
C) more pizza and less soda.
D) more soda to equalize the marginal utility per dollar between soda and pizza.
48) Section 8.1 budget line
Suppose Jill's consumption bundle is made up of 2 goods, apples and bottles of juice. If the price of an apple increases,
then Jill's budget line would
48) ______
A) shift towards the origin on both the apples and bottles of juice axes.
B) not change.
C) shift away from the origin on the bottles of juice axis only.
D) shift towards the origin on the apples axis only.
49) A person's consumption possibilities is defined by the budget line because
49) ______
A) it marks the boundary between what is affordable and unaffordable.
B) all consumers must consume on their budget line.
C) it marks the boundary between what can be produced and what is unattainable given the current state of technology
and resources.
D) it represents the individual's preference for different combinations of goods.
50) Tom's consumption possibilities is defined by
50) ______
A) the prices of the goods that he consumes only.
B) his preferences for consumption of the goods that he consumes.

C) his income only.

D) his income and the prices of the goods that he consumes.
51) Budget lines are drawn on a diagram with the
51) ______
A) quantity of one good on the vertical axis and the quantity of another good on the horizontal axis.
B) price of one good on the vertical axis and the price of another good on the horizontal axis.
C) price of the good on the vertical axis and its quantity on the horizontal axis.
D) quantity of the good on the vertical axis and its price on the horizontal axis.
52) All points below the budget line are 52) ______
A) affordable.
B) preferred to every point on the budget line.
C) inferior to every point on the budget line.
D) Answers A and C are correct.
53) Along a given budget line, 53) ______
A) prices fall and real income is constant.
B) prices and real income both decrease.
C) prices and real income are constant.
D) real income decreases and prices are constant.
54) Ernie has an income of $40 which he plans to spend on cookies and milk. The price of milk is $1 per gallon, and the
price of cookies is $2 per dozen. If Ernie buys 12 gallons of milk, how many dozens of cookies will he buy if he spends all
of his income? 54) ______
A) 14

B) 20

C) 28

D) 12

SECTION 8.3 PREDICTIONS

55) The predictions of marginal utility theory

55) ______

A) contradict the idea that the supply curve slopes upward.

B) support the idea that the demand curve slopes downward.
C) contradict the idea that the demand curve slopes downward.
D) support the idea that the supply curve slopes upward.
56) Teddy buys only chocolate chip cookies and hot chocolate and spends all of his income on the two items. When the
price of a cookie rises. According to marginal utility theory, Teddy will buy
56) ______
A) fewer cookies and more hot chocolate, which decreases his marginal utility from cookies and increases his marginal
utility from hot chocolate.
B) more cookies and less hot chocolate, which increases his marginal utility from cookies and decrease his marginal utility
from hot chocolate.
C) fewer cookies and more hot chocolate, which increases his marginal utility from cookies and decreases his marginal
utility from hot chocolate so that MU per dollar on both the goods is the same after the price change.
D) more cookies and less hot chocolate, which decreases his marginal utility from cookies and increases his marginal
utility from hot chocolate.
57) When the price of popcorn falls, before there is any change in consumption, the
A) marginal utility of popcorn definitely increases.
B) entire total utility of popcorn curve definitely shifts rightward.

57) ______

C) total expenditure on popcorn definitely rises.

D) marginal utility per dollar from popcorn definitely increases.
58) The only goods you consume are pizza and soda. Both are normal goods. For you, pizza and soda are substitutes.
Which of the following leads you to buy more of both goods?
58) ______
A) The price of a pizza falls.
C) The price of a soda falls.

B) Your income increases.

D) Both answers A and B are correct.

59) According to marginal utility theory, a rise in income will

59) ______
A) increase the marginal utility of all goods.
B) increase consumption of all goods.
C) expand a consumer's consumption possibilities and therefore can buy more of a good which increases total utility.
D) None of the above answers is correct.

SECTION 8.4 NEW WAYS OF EXPLAINING CONSUMER CHOICES

60) Suppose that Richard has just told you that he would not pay more than $100 dollars for one of his favorite baseball
cards. You offer to give him $110 dollars for his card and he refuses. What consumer choice theory or effect explains this
result?
60) ______
A) bounded will power B) bounded rationality
C) bounded self-interest D) the endowment effect
61) Gene plays another hour of computer games rather than study for the hour even though he knows that the next day,
when he takes his test, he will regret his decision. Gene is showing ________.
61) ______
A) the endowment effect
C) bounded will power

B) bounded self-interest
D) bounded rationality

62) If Sean thinks that the choice between going to Olive Garden or Red Lobster is simply too confusing, a behavioral
economist will explain that Sean is showing ________. 62) ______
A) bounded self-interestB) bounded will power
C) bounded rationality D) the endowment effect
63) A behavioral economist will explain Tom's donation to charity by saying that Tom is displaying ________.
______
A) the endowment effect
C) bounded rationality

B) bounded will power

D) bounded self-interest

64) If you exhibit endowment effect, then you

64) ______
A) have a strong attachment to things you already own.
B) decide rationally when making decisions about selling but not when making decisions about buying.
C) decide rationally when making decisions about buying but not when making decisions about selling.
D) buy something you cannot afford.

CHAPTER 11 OUTPUT AND COSTS

63)

SECTION 11.1
65) In the short run,
65) ______
A) all factors of production are fixed.
B) all factors of production are variable.
C) the size of the plant is fixed.
D) some firms experience increasing returns to scale.
66) In the short run,
66) ______
A) at least one factor of production is fixed.
B) there are no variable costs.
C) all factors of production are variable. D) all factors of production are fixed.
67) In economics, the short run is the time frame in which the quantities of ________ and the long run is the period of time
in which ________.
67) ______
A) some factors of production are variable; the quantities of all factors of production are fixed
B) all factors of production are variable but technology is fixed; technology is variable
C) some factors of production are fixed; the quantities of all factors of production can be varied
D) all factors of production are fixed; the quantities of all factors of production can be varied
68) The long run
68) ______
A) means a long period of time, always longer than a year.
B) is a period of time in which all factors of production can be varied.
C) is different for different firms.
D) Both answers B and C are correct.
69) A cost that has already been made and cannot be recovered is called a69) ______
A) marginal cost.
B) variable cost. C) fixed cost. D) sunk cost.

SECTION 11.2
70) When the marginal and average products of labor are equal to each other, the 70) ______
A) average product must be at its maximum value.
B) total product must be at its maximum value.
C) marginal product must be at its maximum value.
D) None of the above answers is correct
71) When the marginal product curve is above the average product curve, ________ as output increases.
A) marginal product must decrease
C) average product must increase

71) ______

B) average product must decrease

D) marginal product must increase

72) If a firm's marginal product of labor is less than its average product of labor, then an increase in the quantity of labor it
employs definitely will 72) ______
A) increase its marginal product of labor.
B) not change its average product of labor.
C) decrease its total product.
D) decrease its average product of labor.
73) The marginal product of labor is the change in total product from a one-unit increase in
A) the quantity of capital employed, holding the quantity of labor constant.

73) ______

B) both the quantity of labor and the quantity of other inputs employed.
C) the quantity of labor employed, holding the quantity of other inputs constant.
D) the wage rate.

SECTION 11.3
Total product
(books sold per
Labor (workers)
hour)
0
0
1
10
2
24
3
40
4
58
5
73
6
83
7
87
8
89
9
90
10
90
74) The above table shows the short-run total product schedule for the campus book store. What is the average product
(AP) when 4 workers are employed?
74) ______
A) 13.3 books sold
B) 18 books sold
C) 58 books sold
D) 14.5 books sold
Explanation: AP = (total product / number labor) = (58 / 4)

Total product
Labor (workers per
(baseball hats per
hour)
hour)
0
0
1
4
2
10
3
18
4
25
5
30
75) The table above gives production information for Bob's Baseball Cap Company. Bob's total cost when zero caps are
produced is $200 and workers cost $10 per hour. The total variable cost of producing 18 baseball hats per hour is 75)
______
A) $30.00. Explanation: (TVC = number of labor employed * wage b/c the only source of variable cost is labor.
Number of workers employed for producing 18 caps is 3. TVC = 3*10, the wage.
B) $1.67.
C) $200.00
D) More information is needed to answer the question.

Labor
(workers per day)
0
1
2
3
4
5

Output
(units per day)
0
10
15
18
20
21

76) Cindy's Sweaters' production function is shown in the above table. What is the marginal product of labor when the 4th
worker is hired?76) ______
A) 5 sweaters per day
B) 20 sweaters per day
C) 4 sweaters per day
D) 2 sweaters per day
Explanation: (output from 4 units of labor - output from 3 workers) = 20 - 18
77) Total variable cost is the sum of all the
77) ______
A) costs associated with the production of goods.
B) implicit costs.
C) costs that rise as output increases.
D) costs of the firm's fixed factors of production.
78) A firm's average variable cost is $90, its total fixed cost is $10,000, and its output is 1,000 units. Its total cost is
______
A) between $85,000 and $95,000.
B) between $95,000 and $105,000.
Explanation: TC =TVC + TFC = AVC*Q + TFC = (90*1000) + 1000 =100,000
C) less than $85,000.
D) more than $105,000.

78)

79) Based on the above figure of the costs at Barney's Bagel Bakery, at which level of output will diminishing marginal
returns first occur?
79) ______
A) at 3000 bagels
B) at 1 bagel
C) at 500 bagels
Explanation: after 500 units, MC curve slopes upward. sloping down cost curve means cost decreases.
D) at 2000 bagels
80) Which of the following shifts the AVC curve upward at Barney's Bagel Bakery?
80) ______
A) an increase in the fixed amount of liability insurance premiums that Barney pays for his business
B) a decrease in the hourly wage that Barney pays his workers
C) an increase in the hourly wage that Barney pays his workers
D) Both answers A and C are correct.
81) If as output increases average product increases, then ________.
81) ______
A) average variable cost decreases
B) average fixed cost decreases
C) marginal cost decreases
D) average total cost decreases

SECTION 11.4 LONG RUN COST

Labor
(workers per week)
1
2
3
4
5

Output with Plant 1 (1 oven)

(pizzas per week)
50
80
100
110
115

Output with Plant 2 (2 ovens)

(pizzas per week)
60
130
180
220
240

82) Silvio's Pizza is a small pizzeria. The firm's production function is shown in the table above. Suppose that Silvio's costs
include only the cost of renting ovens, which is $100 per oven per week, the labor cost, $280 per worker per week, and the
opportunity cost of Silvio's entrepreneurship, $1,000 per week.

What is Silvio's long-run average cost if the output is 100 pizzas per week?

82) ______

A) $8.40
B) $11.00
C) $19.40 SEE THE EXPLANATION FOR QUESTION 85.
D) $17.90
83) The LRAC (Long Run Average Cost) curve 83) ______
A) generally lies above the short-run ATC curves.
B) shows the lowest possible marginal cost of producing the different levels of output.
C) is the minimum points on all the short-run ATC curves.
D) shows the lowest attainable average total cost for all levels of output when all inputs can be varied.
84) In the long run,
84) ______
A) output is fixed.
B) all inputs can be varied.
C) some inputs are variable and other inputs are fixed.
D) all inputs are fixed.

Labor
(workers per week)
1
2
3
4
5

Output with Plant 1 (1 oven)

(pizzas per week)
50
80
100
110
115

Output with Plant 2 (2 ovens)

(pizzas per week)
60
130
180
220
240

85) Silvio's Pizza is a small pizzeria. The firm's production function is shown in the table above. Suppose that Silvio's costs
include only the cost of renting ovens, which is $100 per oven per week, the labor cost, $280 per worker per week, and the
opportunity cost of Silvio's entrepreneurship, $1,000 per week.
Suppose Silvio's uses Plant 2. The firm's average total cost is minimized when ________ pizzas per week are produced.
85) ______
A) 130
B) 180
C) 220
Explanation: Calculate TC by adding the costs. the appropriate equation will be TC = 100*2 + 1000 + 280 * n; where n is
the number of workers hired. 100 is multiplied by 2 b/c the quantity 220 is produced in plant 2 with 2 ovens. For e.g. TC
of 220 units is 1200 + 280*4 b/c 4 workers are hired to produce 220 units. TC then is $2320. b/c the question is about ATC,
divide the TC calculated by the quantity of output, which is 220.
If you calculate the ATC for the quantity associated with 3 workers and 5 workers, you will see that the ATC is less for 220
than ATC for producing 180 quantity or 240 .
D) 60

Quantity
0
20
40

Long-run total cost

(dollars)
0
100
160

60
80

180
190

86) The cost data in the above table data show that production is characterized by 86) ______
A) economies of scale. Explanation: quantity doubles but cost increases by less than double.
B) decreasing returns to scale.
C) constant returns to scale.
D) More information is needed to answer the question.

87) In the above figure, economies of scale are present up to an output level of
87) ______
A) 10,000 pounds of coffee. Explanation: Long run costs increase for quantity larger than 10 thousand.
B) 13,000 pounds of coffee.
C) 15,000 pounds of coffee.
D) 5,000 pounds of coffee.
88) Constant returns to scale means that as all inputs are increased,
A) average total cost rises at the same rate as do the inputs.
B) total output increases in the same proportion as do the inputs.
C) average total cost rises.
D) total output remains constant.

88) ______

89) Which of the following is FALSE?

89) ______
A) Long-run average variable costs equal long-run average total costs.
B) In the long run, both the amount of capital and labor used by the firm can be changed.
C) Fixed costs increase in the long run.
D) As a firm produces more output, eventually it experiences diseconomies of scale.

ANSWER KEY TO STUDY QUESTIONS FROM CHAPTERS 8,10 AND 11.

1) B
2) A
3) A
4) C
5) C
6) B
7) D
8) D
9) B
10) B
11) A
12) B
13) D
14) B
15) C
16) A
17) A
18) A
19) B
20) D
21) A
22) A
23) C
24) D
25) B
26) D
27) A
28) B
29) D
30) A
31) B
32) A
33) C
34) a) The economic depreciation of the firm's capital is the market value of its equipment at the beginning of the year,
$30,000, minus its market value at the end of the year, $20,000, so the economic depreciation is $10,000.
b) The partnership's costs are: the rent, $12,000; the interest expense, $1,800; the economic depreciation, $10,000; and, the
opportunity cost of the owners' resources, which is the best alternative use of their resources, working at their previous
job for $40,000 each, for a total of $80,000. therefore the total cost is $103,800.
c) A firm's economic profit is its total revenue minus its total cost. Bill and Steve's total economic profit is $100,000 $103,800 = -$3,800, which means that the firm has an economic loss.
35) a) Technique B is technologically inefficient. It requires more labor and more capital than technique C to produce a
given output. All other techniques are technologically efficient.
b) Economic efficiency occurs when the firm produces a given output at the least cost. Technique D has the lowest cost
and therefore is economically efficient.
c) With the change in costs, the economically efficient method of production changes. The company will now use a more
labor intensive technique A, which, with the lower labor cost, becomes the economically efficient method.
36) A
37) B
38) A
39) D

40) B
41) D
42) C
43) D
44) C
45) D
46) B
47) C
48) D
49) A
50) D
51) A
52) A
53) C
54) A
55) B
56) C
57) D
58) B
59) C
60) D
61) C
62) C
63) D
64) A
65) C
66) A
67) C
68) D
69) D
70) A
71) C
72) D
73) C
74) D
75) A
76) D
77) C
78) B
79) C
80) C
81) A
82) C
83) C
84) B
85) C
86) A
87) A
88) B
89) C