Chapter 11

Microeconomics, 12e , Global Edition (Parkin)
Chapter 11 Output and Costs
1 Decision Time Frames
1) All the decisions made by people who operate firms have one overriding objective, which is to
________.
A) make maximum attainable profit
B) maximize the firm's total revenue
C) maximize the firm's market share
D) maximize the quantity that the firm sells
Answer: A
Topic: Goal
Skill: Conceptual
AACSB: Reflective thinking
2) The short run is a period of time in which

A) the quantity of at least one factor of production is fixed.
B) the amount of output is fixed.
C) prices and wages are fixed.
D) nothing the firm does can be altered.
Answer: A
Topic: Short Run
Skill: Definition
3) The short run is a period of time in which

A) the quantity used of at least one factor of production is fixed.
B) the quantities used of all factors of production are fixed.
C) output prices are fixed.
D) factor of production prices are fixed.
Answer: A
Topic: Short Run
Skill: Definition
4) A period of time in which the quantity of at least one factor of production used by a firm is
fixed is called the
A) market period.
B) intermediate run.
C) short run.
D) long run.
Answer: C
Topic: Short Run
Skill: Definition
1
Copyright 2016 Pearson Education, Ltd.
5) Economists define the short run as a period of time so short that
A) the amount of output cannot be changed except under diminishing marginal returns.
B) the amount of output cannot be changed at all.
C) only one factor of production can be varied.
D) at least one factor of production cannot be varied.
Answer: D
Topic: Short Run
Skill: Definition
6) The short run is a time frame in which

A) at least one factor of production is fixed.
B) all factors of production can be varied.
C) all factors of production are fixed.
D) at least one factor of production can be varied.
Answer: A
Topic: Short Run
Skill: Definition
7) In the short run

A) all factors of production are fixed.
B) at least one factor of production is fixed.
C) all factors of production are variable.
D) there are no variable costs.
Answer: B
Topic: Short Run
Skill: Definition
8) In the short run

A) all factors of production are fixed.
B) labor usage must remain fixed.
C) a firm's plant is fixed.
D) no factors of production are fixed.
Answer: C
Topic: Short Run
Skill: Definition
2
9) The short run is a time period during which
A) a firm can earn a normal profit.
B) all factors of production are variable.
C) at least one factor of production is fixed.
D) all factors of production are fixed.
Answer: C
Topic: Short Run
Skill: Definition
10) The short run is a time frame in which

A) the quantities of some factors of production are fixed and the quantities of other factors of
production can be varied.
B) the quantities of all factors of production can be varied.
C) the quantities of all factors of production are fixed.
D) all costs are sunk costs.
Answer: A
Topic: Short Run
Skill: Definition
11) An example of a variable factor of production in the short run is

A) a building.
B) capital equipment.
C) an employee.
D) land.
Answer: C
Topic: Short Run
Skill: Conceptual
12) When the demand for electricity peaks during the hottest days of summer, Florida Power and
Light Company can generate more electricity by using more fuel and increasing the working
hours of many of its employees. The company cannot, however, increase electric power
production by building additional generating capacity. This means that the company is in the
A) market run.
B) short run.
C) intermediate run.
D) long run.
Answer: B
Topic: Short Run
Skill: Conceptual
3
13) An example of a short-run fixed factor of production is
A) capital equipment.
B) labor.
C) electricity.
D) postage for mailing.
Answer: A
Topic: Short Run
Skill: Conceptual
14) A cost that has already been made and cannot be recovered is called a
A) variable cost.
B) fixed cost.
C) sunk cost.
D) marginal cost.
Answer: C
Topic: Sunk Cost
Skill: Conceptual
15) After constructing a new factory, the cost of building the factory is a
A) past cost.
B) sunk cost.
C) variable cost.
D) None of the above answers are correct.
Answer: B
Topic: The Long Run
Skill: Conceptual
16) The long run is a time frame in which

A) the quantities of some factors of production are fixed and the quantities of other factors of
production can be varied.
B) the quantities of all factors of production can be varied.
C) the quantities of all factors of production are fixed.
D) all costs are sunk costs.
Answer: B
Topic: Long Run
Skill: Definition
4
17) A period of time in which the quantity of all factors of production used by a firm can be
varied is called the
A) market period.
B) variable run.
C) short run.
D) long run.
Answer: D
Topic: Long Run
Skill: Definition
18) In the long run, a firm has

A) no factors of production that are fixed.
B) no factors of production that are variable.
C) no factors of production that are either fixed or variable.
D) fixed factors of production but no variable resources.
Answer: A
Topic: Long Run
Skill: Conceptual
19) The long run

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.
Answer: D
Topic: Long Run
Skill: Conceptual
20) The long run is a period of time in which

A) all factors of production are variable.
B) all factors of production are fixed.
C) some but not all factors of production are fixed.
D) some but not all factors of production are variable.
Answer: A
Topic: Long Run
Skill: Definition
5
21) Which of the following factors is fixed in the long run?
A) capital
B) land
C) entrepreneurship
D) none of the above because all factors are variable in the long run
Answer: D
Topic: The Long Run
Skill: Conceptual
22) In the long run, a firm can vary

A) its capital but not its labor.
B) its labor but not its capital.
C) both its labor and its capital.
D) neither its labor nor its capital.
Answer: C
Topic: Long Run
Skill: Conceptual
23) The long run is distinguished from the short run because only in the long run
A) output prices can vary.
B) factor of production prices can vary.
C) the quantities of all factors of production can be varied.
D) the firm no longer maximizes its profit.
Answer: C
Topic: Long Run
Skill: Conceptual
24) 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 ________.
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) all factors of production are fixed; the quantities of all factors of production can be varied
D) some factors of production are fixed; the quantities of all factors of production can be varied
Answer: D
Topic: Short Run and Long Run
Skill: Conceptual
6
25) In the short run
A) the size of the plant is fixed.
D) some firms experience increasing returns to scale.
Answer: A
Topic: Study Guide Question, Short Run
Skill: Conceptual
26) The long run is a time period in which

A) one year or less elapses.
D) there is at least one fixed factor of production and at least one variable factor of production.
Answer: B
Topic: Study Guide Question, Long Run
Skill: Definition
27) Which of the following statements is CORRECT?

A) A firm does not need to take into account its sunk cost when making current decisions.
B) Long-run decisions are easily reversed.
C) Short-run decisions are not easily reversed.
D) In the long run, a firm can change its plant but not the quantity of its labor.
Answer: A
Skill: Conceptual
2 Short-Run Technology Constraint
1) Total product is
A) the increase in output that results from a one-unit increase in the quantity of labor employed
with all other inputs remaining the same.
B) maximum output that a given quantity of labor can produce.
C) maximum amount of output produced by a given quantity of labor divided by the given
quantity of labor employed.
D) maximum amount of amount of output produced by a given quantity of labor divided by price
of the output.
Answer: B
Topic: Total Product
Skill: Definition
7
2) Points below a firm's total product curve are
A) both attainable and technologically efficient.
B) neither attainable nor technologically efficient.
C) attainable but not technologically efficient.
D) technologically efficient but not attainable.
Answer: C
Topic: Total Product Curve
Skill: Conceptual
3) Points on a firm's total product curve are

A) both attainable and technologically efficient.
B) neither attainable nor technologically efficient.
C) attainable but not technologically efficient.
D) technologically efficient but not attainable.
Answer: A
Skill: Conceptual
4) When the total product curve is drawn in a figure that measures employment along the
horizontal axis, it is a graph that shows the
A) minimum cost of producing a given amount of output using different techniques.
B) maximum profit attainable for each unit of output sold per unit of labor employed.
C) maximum output attainable for each quantity of labor employed.
D) minimum output attainable for each quantity of labor employed.
Answer: C
Skill: Conceptual
5) All the production points that lie ________ the total product curve are attainable and
________.
A) above; efficient
B) above; inefficient
C) below; efficient
D) below; inefficient
Answer: D
Skill: Conceptual
8
6) A firm's total product curve shows
A) that inefficiency is not possible.
B) how the cost of the fixed resources change when output changes.
C) how the amount of output changes when the quantity of labor changes.
D) that in the long run the firm must adjust the quantity of all the resources it employs.
Answer: C
Skill: Conceptual
7) Most total product curves have

A) first increasing and then decreasing marginal returns to labor.
B) output first increasing and then decreasing as labor is added.
C) first decreasing and then increasing marginal returns to labor.
D) output increasing at an increasing rate as labor is added.
Answer: A
Topic: The Marginal Product Curve
Skill: Conceptual
8) The marginal product of labor is equal to the

A) total product divided by the total number of workers hired.
B) increase in the total product that results from hiring one more worker with all other inputs
remaining the same.
C) slope of the marginal product of labor curve.
D) None of the above answers are correct.
Answer: B
Topic: Marginal Product of Labor
Skill: Definition
9) Marginal product is
A) the increase in output that results from a one-unit increase in the quantity of labor employed
with all other inputs remaining the same.
B) total amount of output produced.
C) total amount of output produced divided by the quantity of labor employed.
D) total amount of output produced divided by price of the output.
Answer: A
Skill: Definition
9
10) The marginal product of labor is the increase in total product from a
A) one unit increase in the quantity of labor, while holding the quantity of other inputs constant.
B) one unit increase in the quantity of labor, while also increasing the quantity of other inputs by
one unit.
C) one dollar increase in the wage rate, while holding the price of other inputs constant.
D) one percent increase in the wage rate, while also increasing the price of other inputs by one
percent.
Answer: A
Skill: Definition
11) The marginal product of labor is the change in total product from a one-unit increase in
A) the quantity of labor employed, holding the quantity of other inputs constant.
B) the quantity of capital employed, holding the quantity of labor constant.
C) both the quantity of labor and the quantity of other inputs employed.
D) the wage rate.
Answer: A
Skill: Definition
12) The marginal product of labor is the

A) change in output resulting from a one-unit increase in labor with all other inputs remaining
the same.
B) maximum output attainable with fixed factors of production when labor is the only variable
factor of production.
C) output level above which the slope of the total product curve falls.
D) output level above which the rate of total product per unit of labor falls.
Answer: A
Skill: Definition
13) The total output produced with any quantity of labor is equal to the sum of the
A) marginal products of each of the workers hired.
B) average products of each of the workers hired.
C) total wages the firm pays its workers.
D) Both answers A and B are correct.
Answer: A
Skill: Conceptual
10
14) The average product of labor is equal to the
A) total product divided by the total number of workers hired.
B) total number of workers hired divided by the total product.
C) slope of the marginal product of labor curve.
D) Both answers B and C are correct.
Answer: A
Topic: Average Product of Labor
Skill: Definition
15) Average product equals the

A) increase in output that results from a one-unit increase in the quantity of labor employed with
all other inputs remaining the same.
B) total amount of output produced.
C) total amount of output produced divided by the quantity of labor employed.
D) total amount of output produced divided by price of the output.
Answer: C
Skill: Definition
16) Average product of labor is equal to ________.

A) total product multiplied by the quantity of labor employed.
B) the total product produced
C) the quantity of labor employed divided by total product
D) total product divided by the quantity of labor employed
Answer: D
Skill: Definition
17) The average product of labor is

A) the inverse of the average product of capital.
B) the slope of the curve showing the marginal product of labor.
C) the slope of the curve showing the total product of labor.
D) total product divided by the total quantity of labor employed.
Answer: D
Skill: Definition
11
Pizza Hut
Total product
Labor
(pizzas produced per
(workers)
hour)
0 0
1 5
2 9
3 12
4 14
5 15
18) Using the data in the above table, what is the marginal product of the second worker?
A) 4.5 pizzas per hour
B) 4 pizzas per hour
C) 5 pizzas per hour
D) The marginal product is undefined.
Answer: B
Skill: Conceptual
AACSB: Analytical thinking
19) Using the data in the above table, what is the marginal product of the third employee?
A) 2 pizzas per hour
D) 12 pizzas per hour
Answer: B
Skill: Conceptual
20) Using the data in the above table, what is the average product of three employees?
A) 2 pizzas per hour
D) 12 pizzas per hour
Answer: C
Skill: Conceptual
12
Labor Total product
(workers per day) (hats per day)
0 0
1 4
2 10
3 18
4 25
5 30
21) The above table shows the total product of producing baseball hats. The marginal product of
the 4th worker is equal to
A) 25 baseball hats.
B) 21 baseball hats.
C) 7 baseball hats.
D) 6.25 baseball hats.
Answer: C
Skill: Conceptual
22) The above table shows the total product of producing baseball hats. The average product of 3
workers is equal to
A) 1.67 baseball hats.
B) 6.00 baseball hats.
C) 12.78 baseball hats.
D) 18.00 baseball hats.
Answer: B
Skill: Conceptual
13
Labor Total product Marginal Average
(workers) (units) product product
0 0
1 3
2 4.5
3 14
4 3
5 19
6 1
23) The above (incomplete) table provides information about the relationships between labor and
various product measures. The total product that can be produced with 6 units of labor is
A) 20.
B) 19.
C) More information is needed to answer the question.
D) None of the above answers is correct.
Answer: A
Skill: Conceptual
various product measures. The amount of labor that maximizes the marginal product of labor is
A) 2 units of labor.
B) 3 units of labor.
C) 4 units of labor.
D) 5 units of labor.
Answer: A
Skill: Conceptual
various product measures. The average product of the fourth unit of labor
A) exceeds the marginal product of the fourth unit of labor.
B) is less than the marginal product of the fourth unit of labor.
C) is equal to the marginal product of the fourth unit of labor.
D) is equal to 4.0.
Answer: A
Skill: Conceptual
14
Total Product, Marginal Product, Average Product
Labor Total product Marginal Average
(workers per day) (units per day) product product
0 0 0 0
1 2 2 2
2 8
3 12
4 15
5 16 1
26) In the above table, the marginal product of the second worker is
A) 1.
B) 2.
C) 3.
D) 4.
Answer: D
Skill: Conceptual
27) In the above table, the marginal product of the third worker is
A) 1.
B) 2.
C) 3.
D) 4.
Answer: D
Skill: Conceptual
28) In the above table, the marginal product of the fourth worker is
A) 1.
B) 3.
C) 4.
D) 6.
Answer: B
Skill: Conceptual
15
29) In the above table, the marginal product is greatest when the
A) first worker is hired.
B) second worker is hired.
C) third worker is hired.
D) fourth worker is hired.
Answer: B
Skill: Conceptual
30) In the above table, the average product of three workers is

A) 1.
B) 2.
C) 3.
D) 4.
Answer: D
Skill: Conceptual
31) In the above table, the average product is less than the marginal product
A) when the first worker is hired.
B) when the second worker is hired.
C) when the third worker is hired.
D) for the entire range of output given.
Answer: B
Skill: Conceptual
16
Labor Quantity
(workers per day) (T shirts per day)
0 0
1 10
2 22
3 30
4 34
5 35
32) The table shows some data that describes Tom's T-Shirts' total product when Tom's has 1
sewing machine. When 4 workers are employed, ________.
A) average product of labor is a maximum
B) marginal product of labor is less than average product of labor
C) marginal product of labor exceeds average product of labor
D) marginal product of labor equals average product of labor
Answer: B
Topic: Average Product of Labor and Marginal Product of Labor
Skill: Conceptual
Labor Total product

(workers per day) (pizzas per day)
0 0
1 10
2 25
3 37
4 45
5 50
33) Based on the production data for Pat's Pizza Parlor in the above table, the marginal product
of the 4th worker is ________ pizzas.
A) 5
B) 8
C) 10
D) 45
Answer: B
Skill: Conceptual
17
34) Based on the production data for Pat's Pizza Parlor in the above table, which worker has the
largest marginal product?
A) Worker 1
B) Worker 2
C) Worker 3
D) Worker 4
Answer: B
Skill: Conceptual
35) Based on the above production data table for Ken's Pizza Parlor, we know that the average
product of labor curve begins to decrease after hiring worker ________.
A) 1
B) 2
C) 3
D) 4
Answer: B
Skill: Conceptual
36) Based on the production data for Pat's Pizza Parlor in the above table, the average product of
labor when 4 workers are hired is ________ pizzas.
A) 8
B) 10
C) 11.25
D) 45
Answer: C
Skill: Conceptual
37) Based on the production data for Pat's Pizza Parlor in the above table, which of the following
pair of workers have the same average product?
A) 1 and 2
B) 2 and 4
C) 1 and 5
D) 2 and 5
Answer: C
Skill: Conceptual
18
38) In the figure above, the marginal product of the second worker is
A) 10 units.
B) 5 units.
C) 2 units.
D) 1 units.
Answer: B
Skill: Graphing
39) In the above figure, after the second worker is hired, the marginal product of labor is
A) increasing.
B) diminishing.
C) constant.
D) zero.
Answer: B
Skill: Graphing
40) At point d in the above figure, the average product of labor equals
A) 15.
B) 4.
C) 3.75.
D) approximately 1.
Answer: C
Skill: Graphing
19
41) In the above figure, the average product of labor at point c is
A) 10.
B) 5.
C) 2.
Answer: B
Skill: Graphing
42) In the figure above, ________ is a technologically efficient point.

A) d
B) f
C) g
D) None of the selections is correct.
Answer: A
Skill: Graphing
43) In the above figure, a technologically inefficient point is

A) a.
B) e.
C) g.
D) f.
Answer: D
Skill: Graphing
44) In the above figure, an unattainable point is

A) a.
B) e.
C) g.
D) f.
Answer: C
Skill: Graphing
20
45) In the above figure, the most efficient way to produce 10 units is to hire
A) 1 worker.
B) 2 workers.
C) 3 workers.
D) 5 workers.
Answer: B
Skill: Graphing
46) In the above figure, the most efficient way to produce 15 units is to hire
A) 2 workers.
B) 3 workers.
C) 4 workers.
D) 5 workers.
Answer: C
Skill: Graphing
47) In the above figure, the maximum number of units that 4 workers can produce is
A) 5 units.
B) 10 units.
C) 15 units.
D) more than 15 units.
Answer: C
Skill: Graphing
48) In the above figure, the marginal product of labor is zero at point
A) a.
B) c.
C) e.
D) f.
Answer: C
Topic: Marginal Product Curve
Skill: Graphing
21
49) At point e in the above figure, the marginal product of labor
A) is less than the average product of labor.
B) equals the average product of labor.
C) is greater than the average product of labor.
D) is at its maximum.
Answer: A
Skill: Graphing
50) The steeper the slope of the total product curve, the
A) larger is the marginal product of labor.
B) smaller is the marginal product of labor.
C) higher is the level of the total cost curve.
D) more efficient is the technology employed.
Answer: A
Skill: Conceptual
51) Increasing marginal returns to labor might occur at low levels of labor input because of
A) increasing average costs.
B) differing factor proportions.
C) increasing specialization of tasks.
D) decreasing use of machinery and increasing use of technology.
Answer: C
Topic: Increasing Marginal Returns
Skill: Conceptual
52) In general, increasing marginal returns occur

A) as output expands at low levels of production.
B) through the entire range of production.
C) as output expands at high levels of production.
D) whenever the slope of the total product curve is positive.
Answer: A
Topic: Increasing Marginal Returns
Skill: Conceptual
22
53) At that amount of output where diminishing marginal returns first sets in
A) total product will begin to decline.
B) average product will begin to decline.
C) marginal product will begin to decline.
D) all of the above
Answer: C
Topic: Diminishing Marginal Returns
Skill: Conceptual
54) "Diminishing marginal returns" refer to a situation in which the

A) marginal cost of the next worker hired is less than the marginal cost of the previous worker
hired.
B) average cost of the next worker hired is less than the average cost of the previous worker
hired.
C) marginal product of the next worker hired is less than the marginal product of the previous
worker hired.
D) average product of the next worker hired is less than the average product of the previous
worker hired.
Answer: C
Skill: Definition
55) A firm's total product curve shows that at first it has

A) economies of scale and then diseconomies of scale.
B) diseconomies of scale and then economies of scale.
C) increasing marginal returns and then diminishing marginal returns.
D) diminishing marginal returns and then increasing marginal returns.
Answer: C
Skill: Conceptual
56) Diminishing marginal returns to labor occur because

A) after a while it is hard to find a good worker.
B) the capital resources used by the firm are fixed in the short run.
C) workers become more efficient over time.
D) larger companies are less efficient.
Answer: B
Skill: Conceptual
23
57) Which of the following statements regarding the marginal product curve is FALSE?
A) Increasing marginal returns occur only when the total product increases as the number of
workers increases.
B) Increasing marginal returns is due to greater efficiency from specialization in the production
process.
C) The law of diminishing returns applies in the short run.
D) Along the marginal product curve, increasing marginal returns occur first and then
diminishing marginal returns.
Answer: A
Skill: Conceptual
58) Diminishing marginal returns occur when

A) the average product of the variable input eventually diminishes.
B) the marginal product of an additional worker is less than the marginal product of the previous
worker hired.
C) the firm hires cheap, less-skilled workers in place of expensive, high-skilled workers.
D) total product diminishes.
Answer: B
Skill: Conceptual
59) The law of diminishing returns states that as

A) the size of a plant increases, the firm's fixed cost decreases.
B) the size of a plant increases, the firm's fixed cost increases.
C) a firm uses more of a variable input, given the quantity of fixed inputs, the marginal product
of the variable input eventually diminishes.
D) a firm uses more of a variable input, given the quantity of fixed inputs, the firm's average
total cost will decrease eventually.
Answer: C
Topic: Law of Diminishing Returns
Skill: Conceptual
24
60) The law of diminishing returns states that as a firm increases
A) all the inputs is uses, the marginal product of each of these inputs always decreases.
B) a variable input, with a given quantity of fixed inputs, the firm's marginal cost eventually
decreases.
C) a variable input, with a given quantity of fixed inputs, the marginal product of the variable
input eventually decreases.
D) a variable input, given the quantity of fixed inputs, the firm's average total cost will
eventually decrease.
Answer: C
Skill: Conceptual
61) The law of diminishing marginal returns says that as the firm uses more of ________, with a
given quantity of ________, the ________ product of the variable input eventually diminishes.
A) a fixed input; variable inputs; marginal
B) all inputs; capital; average
C) a variable input; fixed inputs; average
D) a variable input; fixed inputs; marginal
Answer: D
Skill: Conceptual
62) The law of diminishing returns makes it clear that as more a variable input is employed, in
the ________ the marginal product of the variable input eventually will ________.
A) short run; rise
B) long run; rise
C) short run; fall
D) long run; fall
Answer: C
Skill: Conceptual
63) The law of diminishing returns occurs because

A) the marginal product of an additional worker is greater than the marginal product of the
previous worker.
B) the marginal product of a variable input, such as labor, depends in part on the amount of fixed
inputs, such as capital.
C) total production decreases as more of the variable inputs are used.
D) adding more and more workers leads to a decrease in the quantity of capital.
Answer: B
Skill: Conceptual
25
64) The law of diminishing returns implies that, with the quantity of capital fixed, as the use of
labor rises
A) total product will fall eventually.
B) the marginal product of labor will fall eventually.
C) the total product of labor will fall below the marginal product of labor.
D) the production process will become technologically inefficient eventually.
Answer: B
Skill: Conceptual
Labor Total product

(workers) (units)
0 0
5 1000
10 3000
15 4000
20 4500
65) In the above table, between what two levels of output does one first observe the law of
diminishing returns?
A) 0 and 1000
B) 1000 and 3000
C) 3000 and 4000
D) 4000 and 4500
Answer: C
Skill: Conceptual
26
Decent Donuts
Total product
Labor
(dozens of donuts per
(workers)
day)
0 0
1 12
2 26
3 44
4 64
5 86
6 110
7 122
8 125
9 127
10 128
66) Using the table above, what is the marginal product of the 5th worker hired at Decent
Donuts?
A) 86 dozen donuts per day
B) 22 dozen donuts per day
C) 17.2 dozen donuts per day
D) 64 dozen donuts per day
Answer: B
Skill: Conceptual
67) Based on the data in the table above, which worker at Decent Donuts has the highest
marginal product?
A) the fourth
B) the fifth
C) the sixth
D) the seventh
Answer: C
Skill: Conceptual
27
68) Based on the data in the table above, what is the average product of labor when Decent
Donuts employs five workers?
A) 16.66 dozen donuts per day
B) 17.2 dozen donuts per day
C) 20 dozen donuts per day
D) 22 dozen donuts per day
Answer: B
Skill: Conceptual
69) Based on the data in the table above, when Decent Donuts hires eight workers, the
A) average product of labor is greater than the marginal product.
B) marginal product of labor is greater than the average product.
C) marginal product of labor is equal to the average product.
D) marginal product of labor is not defined.
Answer: A
Skill: Conceptual
70) Using the table above, for which of the following levels of employment does the marginal
product of labor exceed the average product of labor at Decent Donuts?
A) four workers
B) seven workers
C) both of the above
D) neither of the above
Answer: A
Skill: Conceptual
71) Using the table above, for which of the following levels of employment does the average
product of labor exceed the marginal product of labor at Decent Donuts?
A) ten workers
B) seven workers
C) both of the above
D) neither of the above
Answer: C
Skill: Conceptual
28
72) Based on the data in the table above, after which worker is hired do diminishing marginal
returns begin?
A) the first
B) the fifth
C) the sixth
D) the ninth
Answer: C
Skill: Conceptual
Labor Total product

(workers) (shirts)
0 0
1 50
2 120
3 180
4 220
5 250
73) The table above shows the short-run product schedule for Virginia's Tee-Shirts. What is the
marginal product associated with the hiring the fifth worker?
A) 30 shirts
B) 50 shirts
C) 235 shirts
D) 250 shirts
Answer: A
Skill: Conceptual
74) The table above shows the short-run product schedule for Virginia's Tee-Shirts. What is the
average product associated with hiring the fourth worker?
A) 40 shirts
B) 55 shirts
C) 50 shirts
D) 220 shirts
Answer: B
Skill: Conceptual
29
75) The table above shows the short-run product schedule for Virginia's Tee-Shirts. The worker
for whom the law of diminishing returns initially occurs is the ________ worker.
A) 5th
B) 4th
C) 3rd
D) 2nd
Answer: C
Skill: Conceptual
Jefferson's Cleaners
Labor Total product
(workers) (suits cleaned per day)
0 0
1 12
2 26
3 46
4 60
5 73
6 84
7 94
8 102
9 109
76) Based on the above table, what is the marginal product of the 6th worker hired at Jefferson's
Cleaners?
A) 10 suits per day
B) 11 suits per day
C) 14 suits per day
D) 84 suits per day
Answer: B
Skill: Conceptual
77) Using the data in the above table, which worker at Jefferson's Cleaners has the highest
marginal product?
A) the second
B) the third
C) the fourth
D) the fifth
Answer: B
Skill: Conceptual
30
78) Using the above table, what is the average product of labor when Jefferson's Cleaners
employs six workers?
A) 11 suits per day
B) 12 suits per day
C) 13 suits per day
D) 14 suits per day
Answer: D
Skill: Conceptual
79) Using the above table, when Jefferson's Cleaners hires three workers
A) the average product of labor is greater than the marginal product.
B) the marginal product of labor is greater than the average product.
C) it has already experienced diminishing marginal returns.
D) Both answers A and C are correct.
Answer: B
Skill: Conceptual
80) Using the data in the above table, which worker hired at Jefferson's Cleaners is the first to
show diminishing marginal returns?
A) the second
B) the third
C) the fourth
D) the fifth
Answer: C
Skill: Conceptual
81) Based on the data in the above table, at what level of output does the marginal cost start to
rise at Jefferson's Cleaners?
A) 45 suits per day
B) 47 suits per day
C) 74 suits per day
D) 85 suits per day
Answer: B
Topic: Cost Curves and Product Curves
Skill: Conceptual
31
Labor Total product (books
(workers) sold per hour)
0 0
1 10
2 24
3 40
4 58
5 73
6 83
7 87
8 89
9 90
10 90
82) The above table shows the short-run total product schedule for the campus book store. What
is the marginal product (MP) of going from 5 to 6 employees at the book store?
A) 83 books sold
B) 13.83 books sold
C) 10 books sold
D) between 11 and 14 books sold
Answer: C
Skill: Conceptual
83) The above table shows the short-run total product schedule for the campus book store. Which
employee has the highest marginal product (MP)?
A) the 10th employee
B) the 5th employee
C) the 4th employee
D) the 1st employee
Answer: C
Skill: Conceptual
84) The above table shows the short-run total product schedule for the campus book store. What
is the average product (AP) of the 4th employee?
A) 58 books sold
B) 14.5 books sold
C) 18 books sold
D) 13.3 books sold
Answer: B
Skill: Conceptual
32
85) The above table shows the short-run total product schedule for the campus book store. When
the fifth employee is hired, the marginal product is ________ and is ________ the average
product.
A) increasing; greater than
B) increasing; less than
C) decreasing; greater than
D) decreasing; less than
Answer: C
Topic: Marginal Product and Average Product of Labor
Skill: Conceptual
86) The above table shows the short-run total product schedule for the campus book store. At
what levels of books sold per hour will the marginal product of labor be greater than the average
product of labor?
A) 40 books sold per hour
B) 73 books sold per hour
C) Both A and B are correct.
D) Neither A nor B is correct.
Answer: C
Topic: Marginal Product and Average Product of Labor
Skill: Conceptual
87) The above table shows the short-run total product schedule for the campus book store. When
the book store hires the 3rd employee
A) the bookstore is still experiencing increasing marginal returns.
B) the book store has already begun to experience diminishing marginal returns, but average
product is still rising.
C) both marginal and average product have already begun to decline.
D) marginal product is at its maximum.
Answer: A
Skill: Conceptual
88) The above table shows the short-run total product schedule for the campus book store. With
which employee do diminishing marginal returns set in?
A) the 9th employee
B) the 6th employee
C) the 5th employee
D) the 2nd employee
Answer: C
Skill: Conceptual
33
Labor Quantity
(workers per day) (T shirts per day)
0 0
1 10
2 22
3 30
4 34
5 35
89) The table above shows some data that describe Tom's T-Shirts' total product when Tom has 1
sewing machine. An increase in the number of workers from 1 to 2 a day increases average
product of labor from ________ T shirts per worker and marginal product of labor is ________ T
shirts per worker.
A) 10 to 11; 22
B) 10 to 22; 12
C) 10 to 22; 22
D) 10 to 11; 12
Answer: D
Skill: Conceptual
90) The table above shows some data that describe Tom's T-Shirts' total product when Tom's has
1 sewing machine. Diminishing marginal returns begin when the ________ is employed.
A) second worker
B) fifth worker
C) fourth worker
D) third worker
Answer: D
Skill: Conceptual
34
Total product
Labor (units per
(workers) hour)
0 0
1 8
2 20
3 34
4 46
5 56
6 64
7
8 74
9 75
91) In the above table, the marginal product of the 7th worker is 6. What is the total product
when 7 workers are employed?
A) 68
B) 70
C) 72
D) 76
Answer: B
Skill: Conceptual
92) In the above table, what is marginal product of labor for the 2nd worker?
A) 20
B) 8
C) 10
D) 12
Answer: D
Skill: Conceptual
93) In the above table, what is marginal product of labor for the 5th worker?
A) 10
B) 14
C) 9
D) 11.2
Answer: A
Skill: Conceptual
35
94) In the above table, what is average product when 4 workers are employed?
A) 12
B) 10
C) 11.5
D) 9.5
Answer: C
Skill: Conceptual
95) In the above table, diminishing marginal returns start to occur when the
A) 3rd worker is employed.
B) 4th worker is employed.
C) 5th worker is employed.
D) 6th worker is employed.
Answer: B
Skill: Conceptual
96) 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
A) decrease its total product.
B) decrease its average product of labor.
C) increase its marginal product of labor.
D) not change its average product of labor.
Answer: B
Topic: Relationship Between Marginal Product and Average Product
Skill: Conceptual
97) Which of the following statements is TRUE?

A) When marginal product is less than average product, average product is increasing.
B) When marginal product is less than average product, average product is decreasing.
C) When marginal product is falling, average product is decreasing.
D) When marginal product is rising, average product is decreasing.
Answer: B
Skill: Conceptual
36
A) If average product equals marginal product, average product decreases.
B) If marginal product equals average product, average product is a maximum.
C) If marginal product equals average product, marginal product is a maximum.
D) If marginal product exceeds average product, marginal product increases.
Answer: B
Skill: Conceptual
99) When the marginal product of labor is greater than the average product of labor, the
A) marginal product of labor must be increasing as labor increases.
B) average product of labor must be increasing as labor increases.
C) total product must be increasing at an increasing rate as labor increases.
Answer: B
Topic: Relationship Between Average Product and Marginal Product
Skill: Conceptual
100) When the average product of labor is greater than the marginal product of labor
A) the marginal product of labor must be increasing as labor increases.
B) there must be increasing marginal returns.
C) the average product of labor is decreasing as labor increases.
D) None of the above answers is correct
Answer: C
Skill: Conceptual
101) When the marginal and average products of labor are equal to each other, the
A) average product must be at its maximum value.
B) marginal product must be at its maximum value.
C) total product must be at its maximum value.
D) None of the above answers is correct
Answer: A
Skill: Conceptual
37
102) When the marginal product of labor is a maximum, the average product of labor is
________.
A) a maximum
B) increasing
C) decreasing
D) equal to marginal product
Answer: B
Skill: Conceptual
103) When the marginal product equals the average product, the
A) average product curve is downward sloping.
B) average product curve is upward sloping.
C) marginal product is at its maximum.
D) average product is at its maximum.
Answer: D
Topic: Relationship Between Average Product and Marginal Product Curves
Skill: Conceptual
104) Which of the following statements is TRUE for any marginal and average?
A) When the marginal is greater than the average, the average increases.
B) When the marginal is less than the average, the average increases.
C) When the marginal is rising, the average is increasing.
D) When the marginal is equal to the average, the average decreases.
Answer: A
Skill: Conceptual
105) When the marginal product curve is above the average product curve, ________ as output
increases.
A) average product must decrease
B) average product must increase
C) marginal product must decrease
D) marginal product must increase
Answer: B
Skill: Conceptual
38
A) The marginal and average product curves intersect at the maximum level of output.
B) At every output level the marginal product curve lies above the average product curve.
C) The marginal product and average product curves intersect when average product is at its
maximum.
D) The marginal product curve always has a positive slope.
Answer: C
Skill: Conceptual
107) The marginal product and average product curves

A) never intersect.
B) intersect at the maximum point of the marginal product curve.
C) intersect at the maximum point of the average product curve.
D) do not intersect at any predictable point.
Answer: C
Skill: Conceptual
108) When the marginal product curve is downward sloping, the average product curve
A) must also be downward sloping.
B) might be either upward or downward sloping.
C) must be upward sloping.
D) must be horizontal.
Answer: B
Skill: Conceptual
109) If a firm's marginal product of labor is greater than its average product of labor, then an
increase in the quantity of labor it employs definitely
A) increases its total product.
B) increases its marginal product of labor.
C) decreases its average product of labor.
D) does not change its average product of labor.
Answer: A
Skill: Conceptual
39
110) With a technological change that increases productivity, the average product curve
________ and the marginal product curve ________.
A) shifts upward; is unchanged
B) is unchanged; is unchanged
C) is unchanged; shifts upward
D) shifts upward; shifts upward
Answer: D
Topic: Technology
Skill: Conceptual
111) Total product divided by the total quantity of labor employed equals the
A) average product of labor.
B) marginal product of labor.
C) average total cost.
D) average variable cost.
Answer: B
Topic: Study Guide Question, Average Product
Skill: Conceptual
112) Diminishing marginal returns occurs when

A) all inputs are increased and output decreases.
B) all inputs are increased and output increases by a smaller proportion.
C) a variable input is increased and output decreases.
D) a variable unit is increased and its marginal product falls.
Answer: D
Topic: Study Guide Question, Diminishing Marginal Returns
Skill: Conceptual
113) The average product of labor exceeds the marginal product of labor
A) when the average product of labor is falling.
B) when the average product of labor is rising.
C) when the marginal product of labor is at its maximum.
D) when the average product of labor is at its maximum.
Answer: A
Topic: Study Guide Question, Relationship Between Marginal & Avg. Product of Labor
Skill: Conceptual
40
114) When the marginal product of labor exceeds the average product of labor
A) the average product of labor is increasing.
B) the average product of labor is decreasing.
C) the total product curve is negatively sloped.
D) the firm is experiencing decreasing returns to scale.
Answer: A
Topic: Study Guide Question, Relationship Between Marginal & Avg. Product of Labor
Skill: Conceptual
Labor Total product

(workers) (units per day)
0 0
1 3
2 12
3 19
4 23
5 25
115) Using the data in the above table, if the firm employs 3 workers, total product (measured in
units per day) and average product and marginal product of the third worker (measured in units
per worker) are
A) 19, 6 1/3, and 9 respectively.
B) 3, 19, and 6 1/3 respectively.
C) 19, 3, and 9 respectively.
D) 19, 6 1/3, and 7 respectively.
Answer: D
Topic: Parallel MyEconLab Questions
Skill: Analytical
116) Using the data in the above table, if the firm employs 5 workers, total product (measured in
units per day) and average product and marginal product of the fifth worker (measured in units
per worker) are
A) 23, 5.00, and 4 respectively.
B) 23, 5.75, and 4 respectively.
C) 25, 5.00, and 2 respectively.
D) 25, 5.75, and 4 respectively.
Answer: C
Skill: Analytical
41
3 Short-Run Cost
1) A firm's total cost (TC) equals the sum of its fixed cost plus its
A) marginal cost.
B) variable cost.
C) variable cost plus its marginal cost.
D) sunk cost plus its variable cost plus its marginal cost.
Answer: B
Topic: Total Cost
Skill: Conceptual
2) Total cost is equal to the

A) sum of the total fixed cost and the total variable cost.
B) sum of the average fixed cost and the average variable cost.
C) difference between the average variable cost and the average fixed cost.
D) product of the marginal cost multiplied by the average total cost.
Answer: A
Topic: Total Cost
Skill: Conceptual
3) Which of the following statements is CORRECT?

A) As output increases, total cost and total fixed cost increase by the same amount.
B) As output increases, total cost and total fixed cost increase but not necessarily by the same
amount.
C) As output increases, total cost increases and total fixed cost decreases.
D) Total fixed cost plus total variable cost equals total cost.
Answer: D
Topic: Total Cost
Skill: Conceptual
4) A firm has fixed costs

A) in the short run and in the long run.
B) in the short run but not in the long run.
C) in the long run but not in the short run.
D) neither in the long run nor in the short run.
Answer: B
Topic: Total Fixed Cost
Skill: Conceptual
42
5) Total fixed cost is the sum of all
A) costs of the firm's fixed factors of production.
B) costs associated with the production of goods.
C) costs that rise as output increases.
D) the marginal costs of the different factors of production.
Answer: A
Skill: Conceptual
6) A firm's total fixed cost (TFC) is a cost

A) it is certain ("fixed") that the firm must pay.
B) that does not change as output changes.
C) that is dependent on marginal cost.
D) that is paid in only the long run.
Answer: B
Skill: Conceptual
7) Total fixed cost

A) increases as output increases.
B) does not change as output changes.
C) decreases as output increases.
D) initially decreases and then increases as output increases.
Answer: B
Skill: Conceptual
8) Which type of cost is does not change as the quantity of output produced changes?
A) total cost
B) average cost
C) fixed cost
D) marginal cost
Answer: C
Skill: Conceptual
43
9) Which of the following would be classified as a fixed cost for the local supermarket?
A) The cost of the boxes of cereal sold in the store.
B) The salary and any overtime paid the store's manager.
C) The rent from the six-year lease for the building the store uses.
D) The Social Security tax the store pays the federal government on the workers' income.
Answer: C
Skill: Conceptual
10) Which of the following would be classified as a fixed cost for the proprietor who owns and
operates the local Texaco station?
A) the federal excise tax paid on each gallon of Texaco gasoline sold
B) the state income tax on the profit earned
C) the rent paid on the 10 year lease for the property on which the station is located
D) the Social Security tax the owner pays the federal government on the owner's income
Answer: C
Skill: Conceptual
11) Total variable cost is the sum of all

A) costs of the firm's fixed factors of production.
B) costs associated with the production of goods.
C) costs that rise as output increases.
D) implicit costs.
Answer: C
Topic: Total Variable Cost
Skill: Conceptual
12) A firm's total variable cost (TVC) is defined as a cost that

A) does not change (is not "variable") as the firm changes its output.
B) changes as the firm changes its output.
C) falls as the firm increases its output.
D) varies only when the firm reaches the long run.
Answer: B
Skill: Conceptual
44
13) Total variable cost
A) increases as output increases.
B) does not change as output changes.
C) decreases as output increases.
D) initially decreases and then increases as output increases.
Answer: A
Skill: Conceptual
14) Ernie's Earmuffs produces 200 earmuffs per year at a total cost of $2,000 and $400 of this
cost is fixed. What is Ernie's total variable cost?
A) $2,400
B) $2,000
C) $1,600
D) $800
Answer: C
Skill: Conceptual
15) Which of the following would be classified as a variable cost for the local Texaco station?
A) interest payments to a local bank for a 5-year loan
B) the total wages paid to the workers who are all paid $16.00 per hour, no matter how many
hours they work each week
C) the premiums paid for liability insurance, which are constant throughout the life of the
contract
D) the opportunity cost of money used to finance the installation of some new pumps
Answer: B
Skill: Conceptual
16) In a diagram with the total cost curve and the total variable cost curve, as output increases,
the vertical distance between these two curves
A) is constant.
B) decreases.
C) increases.
D) gets smaller and then bigger again.
Answer: A
Topic: The Relationship Between Total Cost and Total Variable Cost
Skill: Conceptual
45
cost is fixed. What is Ernie's average total cost?
A) $12
B) $10
C) $8
D) $2
Answer: B
Topic: Average Total Cost
Skill: Conceptual
Labor Total fixed Total variable Total cost

Output (bikes)
(workers) costs (dollars) cost (dollars) (dollars)
0 0 200
1 20 100
2 50
3 60
4 64
18) The table above gives costs at Jan's Bike Shop. Unfortunately, Jan's record keeping has been
spotty. Each worker is paid $100 a day. Labor costs are the only variable costs of production.
What is the total cost of producing 50 bikes?
A) $100
B) $200
C) $300
D) $400
Answer: D
Topic: Total Cost
Skill: Conceptual
What is the total fixed cost of producing 64 bikes?
A) $200
B) $300
C) $400
D) $500
Answer: A
Skill: Conceptual
46
What is the total variable cost of producing 60 bikes?
A) $200
B) $300
C) $400
D) $500
Answer: B
Skill: Conceptual
21) A firm's marginal cost is the increase in its total cost divided by the increase in its
A) quantity of labor.
B) average cost.
C) output.
D) average revenue.
Answer: C
Topic: Marginal Cost
Skill: Conceptual
22) Marginal cost is equal to

A) total cost divided by output.
B) output divided by total cost.
C) the change in total cost divided by the change in total revenue.
D) the change in total cost divided by the change in output.
Answer: D
Skill: Conceptual
23) Marginal cost is the increase in total ________ that results from a one-unit increase in
________.
A) fixed cost; the fixed input
B) cost; output
C) variable cost; the variable input
D) fixed cost; output
Answer: B
Skill: Conceptual
47
24) Marginal cost is
A) all the costs of the fixed inputs.
B) all the costs of production of goods.
C) all the costs that vary with output.
D) the change in the total cost resulting from a one-unit change in output.
Answer: D
Skill: Conceptual
25) Marginal cost is calculated as

A) total cost divided by output.
B) the increase in total cost divided by the increase in output.
C) the increase in total cost divided by the increase in labor, given the amount of capital.
D) total cost minus total fixed cost.
Answer: B
Skill: Conceptual
26) Marginal cost ________ as the quantity produced is increased.

A) first increases and then decreases
B) first decreases and then increases
C) always increases
D) always decreases
Answer: B
Skill: Conceptual
27) A decrease in the price of a fixed factor of production decreases total cost and
A) increases marginal cost.
B) leaves marginal cost unchanged.
C) decreases marginal cost.
D) increases variable cost.
Answer: B
Skill: Conceptual
48
cost is fixed. If he increases output to 220 earmuffs, his total cost increases to $2100, and his
fixed cost remains $400. What is Ernie's marginal cost per earmuff?
A) $105
B) $35
C) $9.55
D) $5
Answer: D
Skill: Conceptual
29) A company could produce 99 units of a good for $316 or produce 100 units of the same good
for $320. The marginal cost of the 100th unit
A) is $3.20.
B) is $4.00.
C) is $320.
D) cannot be calculated with this information.
Answer: B
Skill: Conceptual
30) A company could produce 100 units of a good for $320 or produce 101 units of the same
good for $324. The $4 difference in costs is
A) the marginal benefit of producing the 101st unit.
B) the marginal cost of producing the 101st unit.
C) both the marginal benefit and the marginal cost of producing the 101st unit.
D) neither the marginal benefit nor the marginal cost of producing the 101st unit.
Answer: B
Skill: Conceptual
31) As output increases, marginal cost will eventually

A) increase because of the law of increasing returns.
B) increase because of the law of diminishing returns.
C) decrease because of the law of diminishing returns.
D) decrease because of the law of increasing returns.
Answer: B
Skill: Conceptual
49
A) Average fixed cost equals average total cost plus average variable cost.
B) Average variable cost is always greater than average fixed cost.
C) Average fixed cost equals total fixed cost divided by total output.
D) Average total cost always falls as output increases.
Answer: C
Topic: Average Fixed Cost
Skill: Conceptual
33) As output increases, average fixed cost

A) always decreases.
B) increases, then decreases.
C) decreases, then increases.
D) remains constant.
Answer: A
Skill: Conceptual
34) By using more labor to produce more output, a firm can always reduce its
A) marginal cost.
B) average variable cost.
C) average total cost.
D) average fixed cost.
Answer: D
Skill: Conceptual
35) Average total cost minus average variable cost ________ as output increases because
________ as output increases.
A) decreases and then increases; marginal cost initially decreases and then increases
B) decreases; average fixed cost decreases
C) decreases; marginal returns diminish
D) decreases; economies of scale are present
Answer: B
Skill: Conceptual
50
36) As output increases, AVC approaches ATC because of
A) diseconomies of scale.
B) diminishing marginal returns.
C) decreasing average fixed cost.
D) increasing marginal cost.
Answer: C
Skill: Conceptual
37) Average variable cost is equal to

A) average total cost minus average fixed cost.
B) average total cost multiplied by output.
C) total cost divided by output.
D) the change in total cost divided by the change in output.
Answer: A
Topic: Average Variable Cost
Skill: Conceptual
38) The average total cost curve eventually slopes upwards because of the
A) law of diminishing returns.
B) reductions in average fixed costs.
C) increase in capital costs.
D) decrease in labor costs.
Answer: A
Topic: Why the Average Total Cost Curve is U-Shaped
Skill: Conceptual
39) The average total cost curve

A) is U-shaped.
B) diminishes initially because average fixed costs diminish.
C) increases eventually because of diminishing returns.
D) All of the above answers are correct.
Answer: D
Skill: Conceptual
51
40) Average total costs are total costs divided by
A) total output.
B) total fixed costs.
C) total variable costs.
D) the total number of workers employed.
Answer: A
Skill: Conceptual
41) Average total costs are

A) total costs divided by total output.
B) total output divided by total costs.
C) the change in total costs divided by the change in output.
D) the change in output divided by the change in total costs.
Answer: A
Skill: Conceptual
42) A firm's average total cost is $60, its average variable cost is $30, and its total fixed cost is
$600. Its output is
A) 20 units.
B) 30 units.
C) 40 units.
D) 50 units.
Answer: A
Topic: Average Costs
Skill: Conceptual
52
Labor Output
(workers per day) (units per day)
0 0
1 13
2 18
3 22
4 24
5 25
43) Sandra's Sweaters' production function is shown in the above table. Sandra rents three
knitting machines for $30 a day each and hires workers at a wage rate of $40 a day. If Sandra
produces 18 sweaters per day, what is her average total cost?
A) $5.00
B) $6.67
C) $9.44
D) $10.00
Answer: C
Skill: Conceptual
44) Sandra's Sweaters' production function is shown in the above table. Sandra rents three
knitting machines for $30 a day each and hires workers at a wage rate of $40 a day. If the rental
rate of capital rises to $50 per machine a day, Sandra's ________ curve shifts upward.
A) average variable cost
B) total variable cost
C) average fixed cost
D) marginal cost
Answer: C
Skill: Conceptual
53
Labor Output Total cost
(workers) (frijoles) (dollars)
0 0 1,000
5 1000 3,000
10 3000 5,000
15 4000 7,000
20 4500 9,000
45) The above table gives some production and cost information for Flaming Fernando's, a
restaurant that sells Fiery Frijoles. What is the total fixed cost of producing 4,500 frijoles?
A) $1000
B) $8000
C) $9000
D) More information is needed to determine the answer.
Answer: A
Skill: Conceptual
restaurant that sells Fiery Frijoles. Between what two levels of output does the marginal cost of
producing Fiery Frijoles first begin to rise?
A) 0 and 1000
B) 1000 and 3000
C) 3000 and 4000
D) 4000 and 4500
Answer: C
Skill: Conceptual
restaurant that sells Fiery Frijoles. What is the average variable cost of producing 1,000 frijoles?
A) $1
B) $2
C) $3
Answer: B
Skill: Conceptual
54
restaurant that sells Fiery Frijoles. What is the average total cost of producing 4,500 frijoles?
A) $2
B) $225
C) $9000
Answer: A
Skill: Conceptual
49) The production and cost information provided in the table above for Flaming Fernando's, a
restaurant that sells Fiery Frijoles, is for the
A) short run because there are no variable costs.
B) short run because there is a fixed cost.
C) long run because there are no variable costs.
D) long run because there are no fixed costs.
Answer: B
Skill: Conceptual
50) As output increases, total cost ________, total fixed cost ________, and total variable cost
________.
A) increases; increases; increases
B) increases; increases; does not change
C) increases; does not change; increases
D) does not change; increases; increases
Answer: C
Topic: Total Cost, Variable Cost, and Fixed Cost
Skill: Conceptual
51) The vertical distance between the total variable cost curve and the total cost curve ________
as output increases; the vertical distance between the average variable cost curve and the average
total cost curve ________ as output increases.
A) decreases; remains the same
B) is constant; becomes smaller
C) increases; becomes smaller at first but then increases
D) increases; remains the same
Answer: B
Topic: Fixed Cost and Average Fixed Cost
Skill: Conceptual
55
52) If total fixed cost increases, then the average total cost curve ________ and the marginal cost
curve ________.
A) does not shift; shifts upward
B) shifts upward; shifts upward
C) does not shift; does not shift
D) shifts upward; does not shift
Answer: D
Topic: Fixed Cost and Marginal Cost
Skill: Conceptual
Labor
Output
(workers per
(units per week)
week)
0 0
1 20
2 50
3 70
4 85
5 95
6 100
53) In the table above, the marginal product of the 5th worker is ________ units per week.
A) 2
B) 5
C) 10
D) 19
Answer: C
Skill: Conceptual
54) The table above gives a firm's total product schedule. Suppose labor is the only variable
factor of production. The price of labor is $500 per week and total fixed costs are $600 per week.
What is the total cost of producing 70 units?
A) $1,700
B) $1,900
C) $2,100
D) $2,300
Answer: C
Topic: Total Cost
Skill: Conceptual
56
If 95 units are produced, the average total cost is
A) $6.31.
B) $17.45.
C) $26.32.
D) $32.63.
Answer: D
Skill: Conceptual
What is the marginal cost of producing the 90th unit?
A) $10.00
B) $24.92
C) $31.61
D) $50.00
Answer: D
Skill: Conceptual
57
Decent Donuts
Labor Total product (dozens of
(workers) donuts per day)
0 0
1 12
2 26
3 44
4 64
5 86
6 110
7 122
8 125
9 127
10 128
57) Use the data in the table above and suppose that labor is the only variable factor of
production. If each worker is paid $42.00 per day, what is the average variable cost to Decent
Donuts of producing 122 dozen donuts per day?
A) $1.91
B) $2.16
C) $2.41
D) $3.06
Answer: C
Skill: Conceptual
production. When 122 dozen donuts are produced at Decent Donuts, the MC curve
A) has a positive slope.
B) shows the effect of increasing marginal returns.
C) Both answers A and B are correct.
D) Neither answer A nor B is correct.
Answer: A
Skill: Conceptual
58
production. When 122 dozen donuts are produced at Decent Donuts, the AVC curve
A) has a negative slope.
B) has a positive slope.
C) is at its minimum point.
D) is at its maximum point.
Answer: B
Topic: Average Variable Cost Curve
Skill: Conceptual
60) Use the data in the above table and suppose that labor is the only variable factor of
production. At what level of output does the marginal cost start to rise at Decent Donuts?
A) 0 dozen donuts
B) 111 dozen donuts
C) 128 dozen donuts
D) There is not enough information given to determine when the marginal cost starts to increase.
Answer: B
Skill: Conceptual
Labor Output
(workers per day) (units per day)
0 0
1 10
2 15
3 18
4 20
5 21
61) Cindy's Sweaters' production function is shown in the above table. What is the marginal
product of labor when the 4th worker is hired?
A) 4 sweaters per day
B) 2 sweaters per day
C) 20 sweaters per day
D) 5 sweaters per day
Answer: B
Skill: Conceptual
59
62) Cindy's Sweaters' production function is shown in the above table. Cindy rents two knitting
machines for $30 a day each and hires workers at a wage rate of $40 a day. If Cindy produces 18
sweaters per day, what is her total cost?
A) $120
B) $140
C) $180
D) $60
Answer: C
Topic: Total Cost
Skill: Conceptual
sweaters per day, what is her average fixed cost of production?
A) $3.00
B) $3.33
C) $8.00
D) $11.00
Answer: A
Skill: Conceptual
machines for $30 a day each and hires workers at a wage rate of $40 a day. What is the marginal
cost of the 19th sweater?
A) $40.00
B) $20.00
C) $10.00
D) $8.00
Answer: B
Skill: Conceptual
sweaters per day, what is her average total cost?
A) $6.67
B) $10.00
C) $11.00
D) $13.33
Answer: B
Skill: Conceptual
60
Labor Total product
(workers) (books sold per hour)
0 0
1 10
2 24
3 40
4 58
5 73
6 83
7 87
8 89
9 90
10 90
66) The above table shows the total product schedule for the campus book store. If employees
are paid $6 per hour and there are no other variable costs, then what is the marginal cost (MC)
per book of increasing book sales from 83 to 87 books per hour?
A) $6.00
B) $4.00
C) $2.07
D) $1.50
Answer: D
Skill: Conceptual
67) The above table shows the total product schedule for the campus book store. If each
employee is paid $6 per hour and there are no other variable costs, then at what level of books
sold per hour does the marginal cost begin to increase?
A) 41 books per hour
B) 59 books per hour
C) 73 books per hour
D) 90 books per hour
Answer: B
Topic: Short-Run Cost
Skill: Conceptual
61
68) The above table shows the total product schedule for the campus book store. If each
employee is paid $6 per hour, what is the average variable cost of selling 83 books per hour
(assuming labor costs are the only variable costs of production)?
A) $0.43 per book
B) $0.07 per book
C) $2.30 per book
D) $6.00 per book
Answer: A
Skill: Conceptual
69) The above table shows the total product schedule for the campus book store. If employees
are paid $6 per hour, assuming there are no other variable costs, then the average variable cost of
selling books will reach its minimum at
A) 58 books sold per hour.
B) 59 books sold per hour.
C) 73 books sold per hour.
D) 83 books sold per hour.
Answer: C
Skill: Conceptual
70) The above table shows the total product schedule for the campus book store. When the book
store is selling 60 books per hour it is certain that
A) marginal costs are increasing, but average variable costs are still decreasing.
B) both marginal and average costs are decreasing.
C) both marginal and average costs are increasing.
D) hiring one more employee per hour will lead to fewer books being sold.
Answer: A
Skill: Conceptual
62
Cost schedule
Total variable
Labor Output Total fixed
cost
(workers) (units per day) cost (dollars)
(dollars)
0 0 20 0
1 4 20 25
2 9 20 50
3 13 20 75
4 16 20 100
5 18 20 125
71) In the above table, the total cost of producing 9 units of output is
A) $20.
B) $30.
C) $50.
D) $70.
Answer: D
Topic: Total Cost
Skill: Conceptual
72) The above table shows a firm's

A) long-run costs.
B) short-run costs.
C) short-run and long-run costs.
D) More information is needed to determine if the costs are long-run costs or short-run costs.
Answer: B
Skill: Conceptual
73) In the above table, the total variable cost of producing 16 units of output is
A) $20.
B) $60.
C) $100.
D) $120.
Answer: C
Skill: Conceptual
63
74) Using the data in the above table, when output increases from 4 to 9 units, the marginal cost
of one of those 5 units is
A) $4.00.
B) $4.25.
C) $5.00.
D) $6.25.
Answer: C
Skill: Conceptual
75) Using the data in the above table, the average fixed cost of producing 9 units per day is
A) $2.22.
B) $5.00.
C) $5.55.
D) $20.00.
Answer: A
Skill: Conceptual
76) Using the data in the above table, the average total cost of producing 16 units per day is
A) $1.25.
B) $6.25.
C) $7.00
D) $7.50.
Answer: D
Skill: Conceptual
64
Total variable
Output Total cost
cost
(pies) (dollars)
(dollars)
0 0 300
100 400
200 1,000
300 1,800
400 2,800
77) The above table gives some of the costs of the Delicious Pie Company. What is the total
fixed cost of producing 100 pies?
A) $300
B) $400
C) $700
D) More information is needed to calculate the total fixed cost.
Answer: A
Skill: Conceptual
78) The above table gives some of the costs of the Delicious Pie Company. The marginal cost of
increasing pie output from 200 to 300 pies equals ________ per pie.
A) $1.800
B) $1,000
C) $8
D) $6
Answer: C
Skill: Conceptual
79) The above table gives some of the costs of the Delicious Pie Company. What is the average
variable cost of producing 300 pies?
A) $1,800
B) $6
C) $5
D) More information is needed to calculate the average variable cost.
Answer: C
Skill: Conceptual
65
80) The above table gives some of the costs of the Delicious Pie Company. What is the average
total cost of producing 200 pies?
A) $5.00
B) $650
C) $6.50
D) More information is needed to calculate the average total cost.
Answer: C
Skill: Conceptual
Total product
Labor (workers
(baseball hats per
per hour)
hour)
0 0
1 4
2 10
3 18
4 25
5 30
81) 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 fixed cost of
producing 10 baseball hats per hour is
A) $400.
B) $200.
C) $22.
D) More information is needed to answer the question.
Answer: B
Skill: Conceptual
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
A) $200.00.
B) $30.00.
C) $1.67.
Answer: B
Skill: Conceptual
66
cost when zero caps are produced is $200 and workers cost $10 per hour. The total cost of
producing 30 baseball hats per hour is
A) $50.
B) $200.
C) $250.
Answer: C
Topic: Total Cost
Skill: Conceptual
cost when zero caps are produced is $200 and workers cost $10 per hour. The average fixed cost
A) $1.60
B) $8.00.
C) $9.60.
Answer: B
Skill: Conceptual
cost when zero caps are produced is $200 and workers cost $10 per hour. The average variable
cost of producing 10 baseball hats per hour is
A) $1.
B) $2.
C) $20.
Answer: B
Skill: Conceptual
cost when zero caps are produced is $200 and workers cost $10 per hour. The average total cost
A) $1.67.
B) $50.00.
C) $52.50.
Answer: C
Skill: Conceptual
67
cost when zero caps are produced is $200 and workers cost $10 per hour. The marginal cost per
hat of producing 30 hats per hour (instead of 25) is
A) $240.00 per hat.
B) $250.00 per hat.
C) $8.33 per hat.
D) $2.00 per hat.
Answer: D
Skill: Conceptual
Average
Output Total cost Marginal cost
variable cost
(units) (dollars) (dollars)
(dollars)
0 10
3 80
9 20
14 290
17 380
88) The above (incomplete) table provides information about the relationships between output
and various cost measures. The total fixed cost (TFC) for the firm is
A) zero.
B) $45.
C) $10.
Answer: C
Topic: Total Cost
Skill: Conceptual
and various cost measures. The total cost (TC) of producing 9 units of output is
A) $180.
B) $190.
C) $20.
Answer: B
Topic: Total Cost
Skill: Conceptual
68
and various cost measures. The marginal cost per unit when increasing output from 14 to 17 units
is
A) $20.
B) $30.
C) $380.
Answer: B
Skill: Conceptual
Total Total
Output Total cost
fixed cost variable cost
(tents) (dollars)
(dollars) (dollars)
0 50 0 50
1 50 25 75
2 50 45 95
3 50 70 120
4 50 115 165
91) The above table shows some cost data for Tracey's Tents. What is the marginal cost of the 3rd
tent?
A) $25
B) $20
C) $70
D) $120
Answer: A
Skill: Conceptual
92) The above table shows some cost data for Tracey's Tents. What is the average total cost when
output is 3?
A) $120
B) $30
C) $40
D) $50
Answer: C
Skill: Conceptual
69
93) The above table shows some cost data for Tracey's Tents. What is the average fixed cost
when 4 tents are produced?
A) $50.00
B) $12.50
C) $25.00
D) $37.50
Answer: B
Skill: Conceptual
Quantity Total variable

(barrels of cost
pickles) (dollars)
0 0
1 20
2 35
3 50
4 75
5 110
6 160
94) The above table gives some cost data for Peter's Pickles. Peter's fixed cost is $20. His total
cost of producing 6 barrels of pickles is
A) $160.
B) $180.
C) $450.
D) There is not enough information to answer the question.
Answer: B
Topic: Total Cost
Skill: Conceptual
95) The above table gives some cost data for Peter's Pickles. Peter's fixed cost is $20. The
marginal cost of increasing output from 3 to 4 barrels of pickles is
A) $25.
B) $75.
C) $20.
D) $50.
Answer: A
Skill: Conceptual
70
96) The above table gives some cost data for Peter's Pickles. Peter's fixed cost is $20. The
average total cost (ATC) when 5 barrels of pickles are produced is
A) $22.
B) $26.
C) $35.
D) There is not enough information to answer the question.
Answer: B
Skill: Conceptual
97) The above table gives some cost data for Peter's Pickles. Peter's fixed cost is $20. Average
variable cost (AVC) is lowest when output is equal to
A) 1 barrel of pickles.
B) 2 barrels of pickles.
C) 3 barrels of pickles.
D) 4 barrels of pickles.
Answer: C
Skill: Conceptual
Output Total cost Total variable cost

(T shirts per hour) (dollars) (dollars)
4 42 22
5 50 30
6 60 40
98) The table above gives the cost of producing T-shirts. The total fixed cost is ________ and the
marginal cost of increasing production from 5 to 6 T shirts is ________.
A) $20; $6
B) $20; $10
C) $10.40; $8
D) unable to be determined; $8
Answer: B
Topic: Total Fixed Cost and Marginal Cost
Skill: Conceptual
71
99) The table above gives the cost of producing T-shirts. When 5 T-shirts are produced, the
average fixed cost is ________ and the average variable cost is ________.
A) $4; $10
B) $10; $6
C) $5; $3
D) $4; $6
Answer: D
Topic: Average Fixed Cost and Average Variable Cost
Skill: Conceptual
Cost schedule
Total variable
Labor Output Total cost
cost
(workers) (units per day) (dollars)
(dollars)
0 0 0 30
1 3 20 50
2 8 40 70
3 12 60 90
4 14 80 110
5 15 100 130
100) In the above table, the total fixed cost is

A) $0.
B) $20.
C) $30.
D) $50.
Answer: C
Topic: Fixed Cost
Skill: Conceptual
101) In the above table, when output increases from 8 to 12 units, the marginal cost of one of
those 4 units is
A) $1.20.
B) $2.00.
C) $5.00.
D) $15.00.
Answer: C
Skill: Conceptual
72
102) In the above table, the average fixed cost of producing 15 units of output is
A) $0.50.
B) $2.00.
C) $6.66.
D) $8.66.
Answer: B
Skill: Conceptual
103) In the above table, the average variable cost of producing 14 units of output is
A) $0.175.
B) $5.71.
C) $7.86.
D) $10.00.
Answer: B
Skill: Conceptual
104) In the above table, the average total cost of producing 14 units of output is
A) $5.71.
B) $6.75.
C) $7.00.
D) $7.86.
Answer: D
Skill: Conceptual
105) A firm's average total cost is $100, its average variable cost is $90, and its total fixed cost is
$1,000. Its output is
A) less than 70 units.
B) between 70 and 120 units.
C) between 120 and 170 units.
D) more than 170 units.
Answer: B
Topic: Costs
Skill: Conceptual
73
106) A firm's average total cost is $80, its average variable cost is $75, and its output is 50 units.
Its total fixed cost is
A) less than $100.
B) between $100 and $200.
C) between $200 and $300.
D) more than $300.
Answer: C
Topic: Costs
Skill: Conceptual
107) A firm's average variable cost is $60, its total fixed cost is $3,000, and its output is 600
units. Its average total cost is
A) less than $58.
B) between $58 and $62.
C) between $62 and $64.
D) more than $64.
Answer: D
Topic: Costs
Skill: Conceptual
108) 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) less than $85,000.
B) between $85,000 and $95,000.
C) between $95,000 and $105,000.
D) more than $105,000.
Answer: C
Topic: Costs
Skill: Conceptual
109) A firm's average total cost is $80, its fixed cost is $1000, and its output is 100 units. Its
average variable cost
A) is less than $40.
B) is between $40 and $60.
C) is more than $60.
D) cannot be determined without more information.
Answer: C
Topic: Costs
Skill: Conceptual
74
110) A firm's marginal cost is $30, its average total cost is $50, and its output is 800 units. Its
total cost of producing 801 units is
B) between $40,000 and $40,050.
C) between $40,050 and $40,080.
D) greater than $40,080.
Answer: B
Topic: Costs
Skill: Conceptual
111) A firm's marginal cost is $82, its average total cost is $50, and its output is 800 units. Its
total cost of producing 801 units is
B) between $40,000 and $40,050.
C) between $40,050 and $40,080.
D) greater than $40,080.
Answer: D
Topic: Costs
Skill: Conceptual
112) The vertical distance between a firm's total cost (TC) and its total variable cost (TVC)
curves
A) decreases as output decreases.
B) is equal to the average variable cost, AVC.
C) is equal to the total fixed cost, TFC.
D) is equal to the marginal cost, MC.
Answer: C
Topic: Total Fixed Cost Curve
Skill: Conceptual
75
113) In the above figure, the total fixed cost curve is curve
A) A.
B) B.
C) C.
D) none of the curves in the figure.
Answer: C
Topic: Total Fixed Cost Curve
Skill: Graphing
114) In the above figure, the total variable cost curve is curve
A) A.
B) B.
C) C.
Answer: B
Topic: Total Variable Cost Curve
Skill: Graphing
115) In the above figure, the total cost curve is curve

A) A.
B) B.
C) C.
Answer: A
Topic: Total Cost Curve
Skill: Graphing
76
116) In the above figure, the relationship between costs indicates that the distance between
curves
A) A and B is equal to the fixed cost.
B) A and B is equal to the variable cost.
C) B and C is equal to the fixed cost.
D) B and C is equal to the average total cost.
Answer: A
Skill: Graphing
117) Fernando charges the restaurant Flaming Fernando's $1,000 annually for use of his name. If
Fernando increases the fee for use of his name
A) the restaurant's average fixed cost, average variable cost, average total cost, and marginal cost
curves all shift upward.
B) the restaurant's average fixed cost, average total cost, and marginal cost curves shift upward.
C) the restaurant's average variable cost, average total cost, and marginal cost curves shift
upward.
D) the restaurant's average fixed cost and average total cost curves shift upward.
Answer: D
Topic: Change in the Price of a Resource
Skill: Conceptual
118) As output increases, the slope of the curve showing the firm's average fixed cost is
A) first negative, then positive.
B) first positive, then negative.
C) always negative.
D) always positive.
Answer: C
Topic: Average Fixed Cost Curve
Skill: Conceptual
119) The vertical distance between a firm's average total cost curve, ATC, and its average
variable cost curve, AVC
A) decreases as output increases.
B) is equal to its marginal cost, MC.
C) is equal to its total fixed cost, TFC.
D) is equal to its average product.
Answer: A
Skill: Conceptual
77
120) The output at which average variable cost is a minimum is ________ than the output at
which ________ is a minimum.
A) the same as; average total cost
B) the same as; marginal cost
C) less than; average total cost
D) less than; marginal cost
Answer: C
Topic: Average Variable Cost Curve and Average Total Cost Curve
Skill: Conceptual
121) Which of the following curves is not U-shaped?

A) average variable cost curve
B) average fixed cost curve
C) average total cost curve
D) marginal cost curve
Answer: B
Skill: Conceptual
122) In the figure above, curve C is the ________ curve.

A) average fixed cost
B) average variable cost
C) average total cost
D) marginal cost
Answer: B
Skill: Graphing
78
123) In the figure above, curve A is the ________ curve.
D) marginal cost
Answer: D
Skill: Graphing
124) In the figure above, curve B is the ________ curve.

D) marginal cost
Answer: C
Skill: Graphing
125) In the figure above, when 20 units are produced the marginal cost is
A) less than $8.
B) $8.
C) more than $8 and less than $16.
Answer: A
Topic: Marginal Cost Curve
Skill: Graphing
126) In the figure above, when 40 units are produced the average fixed cost is
A) $4.
B) $8.
C) $12.
D) $20.
Answer: A
Skill: Graphing
79
127) In the above figure, the marginal cost curve is curve
A) A.
B) B.
C) C.
D) D.
Answer: A
Topic: Marginal Cost Curve
Skill: Graphing
128) In the above figure, the average fixed cost curve is curve
A) A.
B) B.
C) C.
D) D.
Answer: D
Skill: Graphing
129) In the above figure, the average variable cost curve is curve
A) A.
B) B.
C) C.
D) D.
Answer: C
Skill: Graphing
80
130) In the above figure, the average total cost curve is curve
A) A.
B) B.
C) C.
D) D.
Answer: B
Topic: Average Total Cost Curve
Skill: Graphing
131) In the above figure, as output increases, the distance between curves B and C decreases
because
A) total cost decreases as output increases.
B) average fixed cost decreases as output increases.
C) there are diminishing returns to average total cost.
D) there are increasing marginal costs as output increases.
Answer: B
Skill: Graphing
132) In the above figure, curve D slopes downward because

A) average fixed costs decrease as output increases.
B) all costs decrease as output increases.
C) there are diminishing returns.
D) there are decreasing marginal costs.
Answer: A
Skill: Graphing
133) In the above figure, the intersection of curves A and C is the point at which
A) average total cost is minimized.
B) average variable cost is minimized.
C) average fixed cost is minimized.
D) total product is maximized.
Answer: B
Topic: Relationship Between Marginal Cost and Average Variable Cost
Skill: Graphing
81
134) In the above figure, the intersection of curves A and B is the point at which
A) average total cost is minimized.
B) average variable cost is minimized.
C) average fixed cost is minimized.
D) total product is maximized.
Answer: A
Topic: Relationship Between Marginal Cost and Average Total Cost
Skill: Graphing
135) The above figure shows the costs at Barney's Bagel Bakery. At which of the following
amounts of output is the AFC be the lowest?
A) at 2000 bagels
B) at 3000 bagels
C) at 3500 bagels
D) None of the above because the AFC is constant regardless of how many bagels are produced
each day.
Answer: C
Skill: Graphing
82
136) The above figure shows the costs at Barney's Bagel Bakery. As the amount of output
increases, the AVC curve approaches the ATC curve because the
A) TFC curve (not shown) slopes down.
B) AFC curve (not shown) slopes down.
C) MC curve is rising.
D) AVC curve is rising.
Answer: B
Skill: Graphing
137) The above figure shows the costs at Barney's Bagel Bakery. After 3000 bagels are produced
each day, the ATC curve starts to slope upward because the
A) MC curve slopes upward.
B) MC exceeds the ATC.
C) AFC curve (not shown) starts to slope upward.
Answer: B
Skill: Graphing
138) The above figure shows the costs at Barney's Bagel Bakery. Up to which level of output
will increasing marginal returns in production be experienced at Barney's Bagel Bakery?
A) up to 500 bagels
B) up to 2000 bagels
C) up to 3000 bagels
D) up to 3500 bagels
Answer: A
Skill: Graphing
139) Based on the above figure of the costs at Barney's Bagel Bakery, at which level of output
will diminishing marginal returns first occur?
A) at 1 bagel
B) at 500 bagels
C) at 2000 bagels
D) at 3000 bagels
Answer: B
Skill: Graphing
83
140) Based on the above figure of the costs at Barney's Bagel Bakery, at which of the following
levels of output does the marginal product of labor equal the average product of labor?
A) at 500 bagels
B) at 2000 bagels
C) at 3000 bagels
D) None of the above because the marginal and average products of labor can never be equal.
Answer: B
Skill: Graphing
141) The above figure shows the costs at Barney's Bagel Bakery. For which of the following
levels of output does the marginal product of labor exceed the average product of labor?
A) at 1000 bagels daily
B) at 2000 bagels daily
C) at 3000 bagels daily
D) all of the above
Answer: A
Skill: Graphing
142) The above figure shows the costs at Barney's Bagel Bakery. For which of the following
levels of output does the average product of labor exceed the marginal product of labor?
A) at 1000 bagels daily
B) at 2000 bagels daily
C) at 3000 bagels daily
D) all of the above
Answer: C
Skill: Graphing
84
143) Some of the cost curves for Ike's Ice Cream Kitchen are given in the above figure. At which
of the following levels of output will AFC be the lowest?
A) at 0 gallons
B) at 10 gallons
C) at 40 gallons
D) at 70 gallons
Answer: D
Skill: Graphing
144) As illustrated in the above figure, after 40 gallons are produced each hour at Ike's Ice Cream
Kitchen, the AVC curve starts to slope upward. The AVC starts to slope upward because the
B) MC exceeds the AVC.
C) ATC curve has not yet reached its minimum.
Answer: B
Skill: Graphing
85
145) As illustrated in the above figure, after 60 gallons are produced each hour at Ike's Ice Cream
Kitchen, the ATC curve starts to slope upward. The ATC starts to slope upward because the
B) MC exceeds the ATC.
C) distance between the ATC and the AVC curve is shrinking.
Answer: B
Skill: Graphing
146) Based on the above figure, up to which level of output will Ike's Ice Cream Kitchen have
increasing marginal returns?
A) only at 0 gallons
B) up to 10 gallons
C) up to 40 gallons
D) up to 60 gallons
Answer: B
Skill: Graphing
147) Based on the above figure, at which level of output does diminishing marginal returns first
occur at Ike's Ice Cream Kitchen?
A) at 0 gallons
B) at 10 gallons
C) at 40 gallons
D) at 60 gallons
Answer: B
Skill: Graphing
148) Some of the cost curves for Ike's Ice Cream Kitchen are given in the above figure. At which
of the following levels of output does the marginal product of labor equal the average product of
labor?
A) at 0 gallons
B) at 10 gallons
C) at 40 gallons
D) at 60 gallons
Answer: C
Skill: Graphing
86
149) Based on the above figure, for which of the following levels of output at Ike's Ice Cream
Kitchen does the marginal product of labor exceed the average product of labor?
A) at 10 gallons
B) at 40 gallons
C) at 70 gallons
D) all of the above
Answer: A
Skill: Graphing
150) Based on the above figure, for which of the following amounts of output at Ike's Ice Cream
Kitchen does the average product of labor exceed the marginal product of labor?
A) at 10 gallons
B) at 40 gallons
C) at 70 gallons
D) all of the above
Answer: C
Skill: Graphing
151) The marginal cost (MC) curve intersects the

A) ATC, AVC, and AFC curves at their minimum points.
B) ATC and AFC curves at their minimum points.
C) AVC and AFC curves at their minimum points.
D) ATC and AVC curves at their minimum points.
Answer: D
Skill: Conceptual
152) If average variable cost is decreasing as output increases, then marginal cost is definitely
A) decreasing as output increases.
B) increasing as output increases.
C) less than average variable cost.
D) greater than average variable cost.
Answer: C
Skill: Conceptual
87
153) When marginal cost is greater than average total cost, the
A) marginal cost decreases as output increases.
B) marginal cost does not change as output increases.
C) average total cost increases as output increases.
D) average total cost decreases as output increases.
Answer: C
Skill: Conceptual
154) If marginal cost is less than average variable cost and output increases, average total cost
________ and average variable cost ________.
A) increases; increases
B) decreases; decreases
C) decreases; increases
D) increases; decreases
Answer: B
Skill: Conceptual
155) If marginal cost exceeds average variable cost but is less than average total cost, then as
output increases average total cost ________ and average variable cost ________.
A) increases; decreases
B) decreases; decreases
C) increases; increases
D) decreases; increases
Answer: D
Skill: Conceptual
156) If marginal cost is less than average total cost, then ________ is ________.
A) average total cost; falling
B) average variable cost; falling
C) marginal cost; falling
D) marginal cost; rising
Answer: A
Skill: Conceptual
88
157) The marginal cost curve passes through the ________ points of the ________ cost curve
and the ________ cost curve.
A) minimum; average total; average variable
B) minimum; average total; average fixed
C) maximum; total cost; total variable
D) minimum; average variable; average fixed
Answer: A
Skill: Conceptual
158) If marginal cost exceeds average variable cost, then ________ cost is ________ as output
increases.
A) average total; at a maximum
B) average total; falling
C) average variable; rising
D) average fixed; at a maximum
Answer: C
Skill: Conceptual
159) Average variable cost is at a minimum at the same amount of output at which
A) average product is at a maximum.
B) marginal product is at a maximum.
C) average product is at a minimum.
D) marginal product is at a minimum.
Answer: A
Skill: Conceptual
160) The range of output over which a firm's average variable cost is decreasing is the same as
the range over which its
A) marginal cost is increasing.
B) average fixed cost is decreasing.
C) average product is increasing.
D) average product is decreasing.
Answer: C
Skill: Conceptual
89
161) If as output increases average product increases, then ________.
A) average total cost decreases
B) average fixed cost decreases
C) marginal cost decreases
D) average variable cost decreases
Answer: D
Skill: Conceptual
162) The output at which average product is a maximum is the same output at which ________ is
a minimum.
D) marginal cost
Answer: B
Skill: Conceptual
163) Increasing marginal returns means that as the firm expands its output, its
A) long-run average total cost increases.
B) long-run average total cost decreases.
C) short-run average total cost increases.
D) short-run average total cost decreases.
Answer: D
Skill: Conceptual
164) Marginal cost eventually increases because

A) of the law of diminishing returns.
B) eventually each additional worker produces a successively smaller addition to output.
C) the marginal product of the variable input eventually falls.
D) All of the above answers are correct.
Answer: D
Skill: Conceptual
90
165) A technological change that increases productivity ________ marginal product and
________ marginal cost.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Answer: B
Skill: Conceptual
166) Which of the following shifts the ATC curve upward at the XYZ Co.?
A) an increase in the hourly wage that XYZ pays its workers
B) a decrease in the hourly wage that XYZ pays its workers
C) an increase in the fixed amount of liability insurance premiums that XYZ pays for its business
Answer: D
Topic: Shifts in the Cost Curves
Skill: Conceptual
167) Which of the following shifts the AVC curve upward at Barney's Bagel Bakery?
A) an increase in the hourly wage that Barney pays his workers
B) a decrease in the hourly wage that Barney pays his workers
C) an increase in the fixed amount of liability insurance premiums that Barney pays for his
business
Answer: A
Skill: Conceptual
168) Which of the following shifts the AVC curve upward at Barney's Bagel Bakery?
A) an increase in the hourly wage that Barney pays his workers
B) an increase in Barney's daily output from hiring more workers
C) an increase in the fixed amount of local property tax that Barney pays on the building he owns
and uses
D) all of the above
Answer: A
Skill: Conceptual
91
169) A change in technology that shifts the firm's total product curve upward without changing
the quantity of capital used
A) shifts the average total cost curve upward.
B) shifts the average total cost curve downward.
C) does not change the cost curves.
D) shifts the marginal cost curve upward.
Answer: B
Topic: Change in Technology and Costs
Skill: Conceptual
170) The a firm's short-run cost curves shifts when there is a change in
A) technology
B) the prices of factors of production
C) the quantity of outputs
D) Both answers A and B are correct.
Answer: D
Topic: Short Run Cost Curves
Skill: Conceptual
171) Which cost always increases as output increases?

A) total cost
B) marginal cost
D) average fixed cost
Answer: A
Topic: Study Guide Question, Total Cost
Skill: Conceptual
172) Pat's Catering finds that when it caters 20 meals a week, its total cost is $6,000. If Pat has
total variable cost of $5,000, what is Pat's total fixed cost?
A) $50
B) $250
C) $1,000
D) $6,000
Answer: C
Topic: Study Guide Question, Total Fixed Costs
Skill: Conceptual
92
173) The change in total cost from producing another unit of output equals the
A) average total cost.
B) variable cost.
C) average variable cost.
D) marginal cost.
Answer: D
Topic: Study Guide Question, Marginal Cost
Skill: Conceptual
174) A farmer discovers that the total cost of growing 50 acres of eggplant is $50,000 and that
the total cost of growing 51 acres of eggplant is $52,000. The marginal cost of the 51st acre of
eggplant is
A) $52,000.
B) $50,000.
C) $2,000.
D) $1,000.
Answer: C
Topic: Study Guide Question, Marginal Cost
Skill: Conceptual
175) Which curve intersects the AVC curve at its minimum point?
A) the MC curve
B) the ATC curve
C) the AFC curve
D) the MP curve
Answer: A
Topic: Study Guide Question, Relationship Between Marginal Cost & Avg. Var. Cost
Skill: Conceptual
176) If the ATC curve has a positive slope, then the MC curve must be
A) horizontal.
B) vertical.
C) above the ATC curve.
D) below the ATC curve.
Answer: C
Topic: Study Guide Question, Relationship Between Marginal Cost & Avg. Total Cost
Skill: Conceptual
93
177) The average variable cost curve shifts downward if
A) there is a decrease in fixed costs.
B) there is a technological advance.
C) the cost of a variable input increases.
D) the price of output decreases.
Answer: B
Topic: Study Guide Question, Technological Change and Costs
Skill: Conceptual
178) The cost of a variable input, such as the wage paid to workers, decreases. This decrease
shifts the
A) total fixed cost curve downward.
B) marginal product of labor curve downward.
C) average variable cost curve downward.
D) marginal product of labor curve upward.
Answer: C
Topic: Study Guide Question, Change in the Price of a Resource
Skill: Conceptual
Total fixed Total variable

Labor Output Total cost, TC
cost, TFC cost, TVC
(workers) (units) (dollars)
(dollars) (dollars)
0 0 20 0 20
1 4 20 25 45
2 9 20 50 70
3 13 20 75 95
4 16 20 100 120
5 18 20 125 145
179) Using the data in the above table, the average fixed cost of producing 16 units is
A) $1.11 a unit.
B) $1.25 a unit.
C) $1.54 a unit.
D) $2.22 a unit.
Answer: B
Skill: Conceptual
94
180) Using the data in the above table, when the firm increases its output from 4 to 9 units, the
marginal cost of a unit is
A) $4.00 a unit.
B) $5.00 a unit.
C) $6.00 a unit.
D) $7.00 a unit.
Answer: B
Skill: Conceptual
181) In the above figure, which of the following statements is FALSE?

A) The total fixed cost curve is curve C.
B) Total variable cost and total cost both increase as output increases.
C) Marginal cost is equal to the slope of curve A.
D) The vertical gap between curves A and B is equal to average fixed cost.
Answer: D
Skill: Graphing
95
182) In the above figure, which of the following statements is FALSE?
A) Average fixed cost decreases as output decreases.
B) The vertical gap between curves B and C equals marginal fixed cost.
C) The vertical gap between curves B and C gets smaller as AFC decreases.
D) Curve A is the marginal cost curve.
Answer: B
Skill: Graphing
183) Poppy Lipstick is a lipstick producer. A decrease in the rent paid by Poppy Lipstick
A) shifts its TFC curve downward but not its TVC curve.
B) shifts both its TFC curve and its TVC curve downward.
C) does not shift its TFC curve but shifts its TVC curve upward.
D) does not shift its TFC curve but shifts its TVC curve downward.
Answer: A
Skill: Conceptual
184) Sticky Cakes is a bakery. A decrease in the wage rate that Sticky Cakes pays its workers
A) does not shift its MC curve or its ATC curve.
B) shifts its MC curve downward but not its ATC curve.
C) shifts both its MC curve and its ATC curve downward.
D) does not shift its MC curve but shifts its ATC curve downward.
Answer: C
Skill: Conceptual
96
4 Long-Run Cost

A) In the long run, the average cost curve is always downward sloping.
B) In the long run, the quantities of all inputs are fixed.
C) In the long run, the firms' fixed costs are greater than its variable costs.
D) In the long run, all costs are variable costs.
Answer: D
Topic: Long Run
Skill: Definition
2) Which of the following is FALSE?

A) Long-run average variable costs equal long-run average total costs.
B) Fixed costs increase in the long run.
C) As a firm produces more output, eventually it experiences diseconomies of scale.
D) In the long run, both the amount of capital and labor used by the firm can be changed.
Answer: B
Topic: Short Run Versus Long Run
Skill: Conceptual
3) In the long run

A) all inputs can be varied.
B) all inputs are fixed.
C) some inputs are variable and other inputs are fixed.
D) output is fixed.
Answer: A
Topic: Long Run
Skill: Definition
4) The firm's production function is the relationship between the ________ and ________.
A) output produced; the quantities of all inputs
B) maximum output attainable; the quantity of variable inputs
C) possible range of maximum output; the quantity of variable inputs
D) maximum output attainable; the quantities of both labor and capital
Answer: D
Topic: Production Function
Skill: Conceptual
97
5) A firm's long run cost is the cost of production when the firm
A) calculates its cost at least one year into the future.
B) adds together all of its short run costs.
C) uses the economically efficient quantities for its plant and its labor.
D) can vary the amount of output it produces.
Answer: C
Topic: Long-Run Cost
Skill: Conceptual
6) A firm's long-run average cost curve

A) shows the lowest attainable average total cost of producing any level of output when the plant
and labor are fixed.
B) is the sum of all of its short-run average cost curves.
C) tells the firm which plant size to use and which quantity of labor to use to minimize the cost
of producing any level of output.
D) all of the above
Answer: C
Topic: Long-Run Average Cost Curve
Skill: Conceptual
7) The long-run average cost curve is the

A) change in total product divided by the change in capital when the quantity of labor is
constant.
B) change in output resulting from a one-unit increase in the quantity of capital.
C) relationship between the lowest attainable average total cost and output when both the plant
size and labor are varied.
D) relationship between the lowest attainable average total cost and output when both the plant
size and labor are fixed.
Answer: C
Skill: Conceptual
8) A firm's long-run average cost curve

A) shows the lowest attainable average total cost of producing any level of output when the plant
and labor are variable.
B) is U-shaped.
C) tells the firm which plant size to use and which quantity of labor to use to minimize the cost
of producing any level of output.
D) all of the above
Answer: D
Skill: Conceptual
98
9) Which of the following is CORRECT?
A) A firm's short-run average cost curve is derived from a series of long-run average cost curves.
B) A firm's long-run average cost curve is derived from a series of short-run average cost curves.
C) A firm's long-run total cost is the difference between its long-run fixed cost and long-run
variable cost.
Answer: B
Skill: Conceptual
10) For each short-run average total cost curve, the ________ the plant, the ________ is the
output at which average total cost is at a ________.
A) larger; greater; maximum
B) larger; greater; minimum
C) larger; smaller; minimum
D) smaller; smaller; minimum
Answer: B
Skill: Conceptual
Labor Output with Plant 1 (1 oven) Output with Plant 2 (2 ovens)

(workers per week) (pizzas per week) (pizzas per week)
1 50 60
2 80 130
3 100 180
4 110 220
5 115 240
11) 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 kitchen currently has enough room for only one oven. If Silvio employs 3
workers, producing 200 pizzas per week is ________ in the short run and ________ in the long
run.
A) impossible; impossible
B) impossible; possible
C) possible; impossible
D) possible; possible
Answer: B
Skill: Conceptual
99
If Silvio's uses Plant 1, the marginal product of the 3rd worker is ________ pizzas per week.
A) 33
B) 100
C) 20
D) 80
Answer: C
Skill: Conceptual
With Plant 2, Silvio's average product per worker is highest if ________ workers per week are
employed.
A) 3
B) 4
C) 5
D) 2
Answer: D
Skill: Conceptual
entrepreneurship, $1,000 per week. Suppose Silvio's uses Plant 2. If Silvio hires the 4th worker,
the firm will experience ________ marginal returns.
A) diminishing
B) increasing
C) constant
D) zero
Answer: A
Skill: Conceptual
100
entrepreneurship, $1,000 per week. When Silvio's uses 2 ovens and hires the 3rd worker, the
marginal product of labor is ________ the average product of labor, and therefore the average
product of labor ________.
A) less than; decreases
B) less than; increases
C) greater than; decreases
D) greater than; increases
Answer: B
Skill: Conceptual
entrepreneurship, $1,000 per week. Suppose Silvio's uses Plant 1 and hires 3 workers. What is
the firm's average fixed cost?
A) $4.33
B) $8.40
C) $19.40
D) $11.00
Answer: D
Skill: Conceptual
Suppose Silvio's uses Plant 1 and hires 2 workers. What is the firm's average variable cost?
A) $7.00
B) $6.40
C) $19.50
D) $8.25
Answer: A
Skill: Conceptual
101
Suppose Silvio's uses Plant 2 and hires 4 workers. What is the firm's average total cost?
A) $6.00
B) $8.26
C) $10.55
D) $12.40
Answer: C
Skill: Conceptual
Suppose Silvio's uses Plant 2. What is the marginal cost of producing the 200th pizza?
A) $5.09
B) $7.00
C) $10.55
D) $4.40
Answer: B
Skill: Conceptual
Suppose Silvio's uses Plant 2. The firm's average total cost is minimized when ________ pizzas
per week are produced.
A) 180
B) 130
C) 220
D) 60
Answer: C
Skill: Conceptual
102
What is Silvio's long-run average cost if the output is 100 pizzas per week?
A) $8.40
B) $11.00
C) $19.40
D) $17.90
Answer: D
Topic: Long-Run Average Cost
Skill: Conceptual
22) Dustin's copy shop can use four alternative plants. The figure above shows the average total
cost curves for Plant 1 (ATC1), Plant 2 (ATC2), Plant 3 (ATC3), and Plant 4 (ATC4).What is
Dustin's long-run average cost if the output is 3,000 copies per day?
A) 3.7 cents per copy
B) 5.0 cents per copy
C) 8.5 cents per copy
D) More information is needed to determine the long-run average cost.
Answer: A
Skill: Graphing
103
cost curves for Plant 1 (ATC1), Plant 2 (ATC2), Plant 3 (ATC3), and Plant 4 (ATC4). Dustin's
Plant 2 will be economically efficient if the firm produces
A) 2,000 copies per day.
B) 4,800 copies per day.
C) 5,300 copies per day.
D) 6,000 copies per day.
Answer: B
Skill: Graphing
cost curves for Plant 1 (ATC1), Plant 2 (ATC2), Plant 3 (ATC3), and Plant 4 (ATC4). Dustin's
minimum efficient scale is
A) 2,650 copies per day.
B) 6,000 copies per day.
C) 4,000 copies per day.
D) More information is needed to determine the minimum efficient scale.
Answer: C
Skill: Graphing
104
25) The average total cost curves for plants A, B, C and D are shown in the above figure. Which
plant is best to use to produce 20 units per day?
A) plant A
B) plant B
C) plant C
D) plant D
Answer: A
Skill: Graphing
A) plant A
B) plant B
C) plant C
D) plant D
Answer: B
Skill: Graphing
105
A) plant A
B) plant B
C) plant C
D) plant D
Answer: C
Skill: Graphing
28) The average total cost curves for plants A, B, C, and D are shown in the above figure. The
plant size that is the most economically efficient
A) is plant A.
B) is plant B.
C) is plant C.
D) depends on the desired level of output.
Answer: D
Skill: Graphing
29) The average total cost curves for plants A, B, C, and D are shown in the above figure. It is
possible that the long-run average cost curve runs through points
A) a, b, and c.
B) b, d, and e.
C) d, e, and f.
D) c and d.
Answer: C
Skill: Graphing
106
30) The average total cost curves for Plant 1, ATC0, and Plant 2, ATC1, are shown in the figure
above. Over what range of output is it efficient to operate Plant 1?
A) 0-20
B) 0-25
C) 20-25
D) greater than 25
Answer: B
Skill: Graphing
above. Over what range of output is it efficient to operate Plant 2?
A) 0-20
B) 0-25
C) 20-25
D) greater than 25
Answer: D
Skill: Graphing
107
above. The long-run average cost curve goes through points
A) C, D, G.
B) A, C, E.
C) A, B, D, G.
D) A, B, D, E, F.
Answer: C
Skill: Graphing
33) A firm is operating in its range of economies of scale and is on both its LRAC curve and its
short-run ATC curve. At that level of output, the slope of its LRAC curve is
A) zero and the slope of its ATC curve is zero.
B) zero and the slope of its ATC curve is negative.
C) negative and the slope of its ATC curve is zero.
D) negative and the slope of its ATC curve is negative.
Answer: D
Skill: Conceptual
34) When economies of scale are present, the LRAC curve touches each short-run ATC curve
A) to the left of the ATC curve's minimum point.
B) to the right of the ATC curve's minimum point.
C) at the ATC curve's minimum point.
D) at no points.
Answer: A
Skill: Conceptual
35) Economies of scale refer to

A) the point at which marginal cost equals average cost.
B) the fact that in the long run, fixed costs remain constant as output increases.
C) the range of output over which the long-run average cost falls as output increases.
D) a feature of short-run production functions but not long-run production functions.
Answer: C
Topic: Economies of Scale
Skill: Definition
108
36) In the short run
A) all inputs are variable.
B) all firms experience increasing returns to scale.
C) some firms experience economies of scale.
D) no firm experiences economies of scale.
Answer: D
Skill: Conceptual
37) When long-run average costs decrease as output increases, there are
A) economies of scale.
B) diseconomies of scale.
C) constant returns to scale.
D) constant marginal costs.
Answer: A
Skill: Conceptual
38) When a firm experiences economies of scale, its ________ cost curve slopes ________ as
output increases.
A) long-run average; downward
B) short-run average total; downward
C) short-run marginal cost; downward
D) long-run average; upward
Answer: A
Skill: Conceptual
39) A firm experiences ________ when its ________ downward as output increases.
A) diseconomies of scale; average total cost curve slopes
B) economies of scale; long-run average cost curve slopes
C) diminishing marginal returns; long-run average cost curve slopes
D) diminishing marginal returns; average total cost curve shifts
Answer: B
Skill: Conceptual
109
40) Economies of scale refer to the range of output over which
A) marginal cost exceeds average cost.
B) the long-run average cost falls as output increases.
C) the marginal product of labor diminishes.
D) the long-run average cost is less than the short-run average total cost.
Answer: B
Skill: Definition
41) When long-run average cost decreases as output increases, there are definitely
I. increasing marginal returns.
II. economies of scale.
A) only I
B) only II
C) both I and II
D) neither I nor II
Answer: B
Skill: Conceptual
42) If Dell Computer Company could produce more computers at lower long-run average cost by
increasing the quantity of all the inputs it uses, Dell definitely would experience
A) decreasing marginal returns.
C) increasing marginal returns.
D) economies of scale.
Answer: D
Skill: Conceptual
43) When long-run average cost decreases as output increases there are definitely
A) increasing marginal returns.
B) economies of scale.
Answer: B
Skill: Conceptual
110
44) Electric utility companies have built larger and larger electric generating stations and, as a
result, the long-run average cost of producing each kilowatt hour decreased. This is an example
of
A) constant returns to cost.
B) increasing returns to cost.
C) economies of scale.
D) diseconomies of scale.
Answer: C
Skill: Conceptual
45) Electric utility companies have built larger and larger electric generating stations and, as a
result, the long-run average cost of producing each kilowatt hour decreased. This is an example
of
A) increasing marginal returns.
B) diminishing marginal returns.
Answer: C
Skill: Conceptual
46) If the average total cost of producing 20 sweaters an hour falls when the firm doubles all its
inputs, then the
A) short-run average total cost curve shifts upward because all inputs have increased.
B) firm moves along its short-run average total cost curve.
C) firm experiences economies of scale.
D) long-run average cost curve shifts downward.
Answer: C
Skill: Conceptual
47) If all inputs are increased by 5 percent and output increases by 8 percent, then the
A) firm experiences constant returns to scale.
B) long-run average cost curve slopes downward.
C) long-run average cost curve shifts downward.
D) firm experiences diseconomies of scale.
Answer: B
Skill: Conceptual
111
48) Economies of scale occur when the percentage increase in output
A) exceeds the percentage increase in all inputs.
B) is less than the percentage increase in all inputs.
C) exceeds the percentage decrease in all inputs.
D) is less than the percentage decrease in all inputs.
Answer: A
Skill: Conceptual
49) Economies of scale

A) lead to rising long-run average costs as output increases.
B) occur if output more than doubles when all inputs are doubled.
C) occur if output less than doubles when all inputs are doubled.
D) occur when management complexity brings rising average cost.
Answer: B
Skill: Definition
50) Diminishing marginal returns means that the firm definitely is experiencing
A) diseconomies of scale.
B) constant returns to scale.
Answer: D
Topic: Diseconomies of Scale
Skill: Conceptual
51) "Diseconomies of scale" occur in

A) the long run, but not the short run.
B) the short run, but not the long run.
C) both the short run and the long run.
D) neither the short run nor the long run.
Answer: A
Skill: Conceptual
112
52) When long-run average cost increases as output increases there are
D) none of the above.
Answer: B
Skill: Definition
53) When long-run average costs increase as output increases, there are
D) constant marginal costs.
Answer: B
Skill: Conceptual
54) Diseconomies of scale definitely means that as the firm increases its output, its
A) long-run average total cost increases.
B) long-run average total cost decreases.
C) short-run average total cost increases.
D) short-run average total cost decreases.
Answer: A
Skill: Definition
55) If diseconomies of scale are present and the firm ________ all its inputs, its output
________.
A) doubles; more than doubles
B) doubles; less than doubles
C) increases; increases by the same percentage
D) halves; doubles
Answer: B
Skill: Conceptual
113
56) One reason for diseconomies of scale is that, at very large scales, management systems can
become
A) more efficient because they can effectively manage more workers.
B) increasingly complex and inefficient.
C) more numerous than the workers they manage.
Answer: B
Skill: Conceptual
57) A common source of diseconomies of scale is the

A) diminishing marginal returns to capital.
B) diminishing marginal returns to labor.
C) diminishing marginal returns to land.
D) growing complexity of management and organizational structure.
Answer: D
Skill: Conceptual
Long-run total
Quantity
cost (dollars)
0 0
20 100
40 160
60 180
80 190
58) The cost data in the above table data show that production is characterized by
C) decreasing returns to scale.
Answer: A
Skill: Conceptual
114
59) Based on the cost data in the above table, the long-run average cost (LRAC) is lowest when
output is
A) 20.
B) 40.
C) 80.
D) Long-run average cost is constant at all levels of output.
Answer: C
Skill: Conceptual
60) When long-run average cost remains constant as output increases there are constant
A) marginal returns.
B) returns to scale.
Answer: B
Topic: Constant Returns to Scale
Skill: Conceptual
61) Farmer Seth has a perfectly flat long-run average total cost curve over the range of output
from 10,000 bushels of wheat to 100,000 bushels of wheat. Hence, over this range of output,
Farmer Seth definitely experiences
A) constant marginal returns.
C) constant economies of scale.
Answer: B
Skill: Conceptual
115
62) In the above figure, the long-run average cost curve exhibits economies of scale
A) between 5 and 10 units per hour.
B) between 10 and 20 units per hour.
C) between 20 and 25 units per hour.
D) along the entire curve.
Answer: A
Skill: Graphing
63) In the above figure, between 5 and 10 units per hour, the firm experiences
D) decreasing total fixed costs.
Answer: A
Skill: Graphing
64) In the above figure, the long-run average cost curve exhibits constant returns to scale
Answer: B
Skill: Graphing
116
65) In the above figure, the long-run average cost curve exhibits diseconomies of scale
Answer: C
Skill: Graphing
66) In the above figure, between 20 and 25 units per hour, the firm experiences
D) increasing total fixed costs.
Answer: B
Skill: Graphing
67) In the above figure, economies of scale are present up to an output level of
A) 5,000 pounds of coffee.
B) 10,000 pounds of coffee.
C) 13,000 pounds of coffee.
D) 15,000 pounds of coffee.
Answer: B
Topic: Economies and Diseconomies of Scale
Skill: Graphing
117
68) In the above figure, the minimum efficient scale of output is
A) 5,000 pounds of coffee.
B) 10,000 pounds of coffee.
C) 13,000 pounds of coffee.
D) 15,000 pounds of coffee.
Answer: B
Topic: Minimum Efficient Scale
Skill: Graphing
69) If wages a firm pays it workers increase, then

A) the firm's long-run average cost curve shifts upward.
B) the firm moves rightward along its long-run average cost curve to where it has diseconomies
of scale.
C) the firm's long-run average cost curve does not shift and there is no movement along the long-
run average cost curve.
D) the firm moves rightward along its long-run average cost curve but not necessarily to where it
has diseconomies of scale.
Answer: A
Skill: Conceptual
70) The LRAC curve

A) is the minimum points on all the short-run ATC curves.
B) shows the lowest possible marginal cost of producing the different levels of output.
C) shows the lowest attainable average total cost for all levels of output when all inputs can be
varied.
D) generally lies above the short-run ATC curves.
Answer: A
Topic: Study Guide Question, Long-Run Average Cost Curve
Skill: Conceptual
71) The LRAC curve generally is

A) shaped as an upside-down U.
B) U-shaped.
C) upward sloping.
D) downward sloping.
Answer: B
Topic: Study Guide Question, Long-Run Average Cost Curve
Skill: Conceptual
118
72) When a firm is experiencing economies of scale
A) the MP curve slopes upward.
B) the LRAC curve slopes downward.
C) diminishing returns to labor have been suspended.
D) the MC curve slopes downward.
Answer: B
Topic: Study Guide Question, Economies of Scale
Skill: Conceptual
73) Constant returns to scale means that as all inputs are increased
A) total output remains constant.
B) average total cost rises.
C) average total cost rises at the same rate as do the inputs.
D) total output increases in the same proportion as do the inputs.
Answer: D
Topic: Study Guide Question, Constant Returns to Scale
Skill: Conceptual
74) When a firm is experiencing diseconomies of scale

A) the MP curve has a negative slope.
B) the LRAC curve has a positive slope.
C) it must also experience diminishing returns to labor.
D) the MC curve has a negative slope.
Answer: B
Topic: Study Guide Question, Diseconomies of Scale
Skill: Conceptual
5 News Based Questions
1) In 2008, Precision Pattern Interiors, which makes high-end aircraft interiors, began a $1
million renovation of a building at the Hutchinson Air Base Industrial Tract south of Yoder,
Kansas. The company will also add some $400,000 in new equipment and triple its Yoder work
force. Which of Precision Pattern Interiors' decisions is a short run decision?
A) triple its Yoder work force
B) $1 million renovation of a building at the Hutchinson Air Base Industrial Tract
C) $400,000 in new equipment purchases
D) All of these decisions are short run decisions.
Answer: A
Skill: Conceptual
119
force. Which of Precision Pattern Interiors' decisions is a long run decision?
A) $1 million renovation of a building at the Hutchinson Air Base Industrial Tract and $400,000
in new equipment purchases
B) $1 million renovation of a building at the Hutchinson Air Base Industrial Tract
C) $400,000 in new equipment purchases
D) triple its Yoder work force
Answer: A
Topic: Long-Run Cost
Skill: Conceptual
force. Why would the long run decisions be riskier than the short run decisions?
A) because the firm has to live with the long run decisions for a long time
B) because it is easier to sell the equipment than it is to lay off employees
C) because the firm has to raise prices to purchase equipment
D) because employees will be upset
Answer: A
Topic: Long Run
Skill: Conceptual
4) For the past 15 years the American public has wanted to buy big trucks. The Big Three
automakers delivered, investing billions in plants that build gas guzzlers. Now, when customers
walk into showrooms, gas mileage is on their mind. Retooling the industry will take years, so in
the meantime GM, Ford and Chrysler are tweaking their existing models. They're changing tires,
adjusting transmissions and exhaust valves in hopes of getting one or maybe two more miles per
gallon. Which of the decisions by the Big Three to gain gas mileage is a short run decision?
A) adjusting exhaust valves
B) adjusting transmissions
C) changing tires
D) All of these decisions are short run decisions.
Answer: D
Topic: Short Run
Skill: Conceptual
120
5) For the past 15 years the American public has wanted to buy big trucks. The Big Three
automakers delivered, investing billions in plants that build gas guzzlers. Now, when customers
walk into showrooms, gas mileage is on their mind. Retooling the industry will take years. Mike
Quincy says the industry is "like a huge aircraft carrier. It doesn't stop on a dime. It doesn't turn
on a dime." What does Mike mean?
A) The decision time frame to enter into the long run is very long in this industry.
B) The industry has increasing returns to scale.
C) Short run decisions are easily reversed.
D) The industry experiences diminishing marginal returns.
Answer: A
Topic: Long Run
Skill: Conceptual
6) Angel Rodriguez pulls up in his 24-foot panel truck in front of Sezz Medi Brick Oven Pizza in
Upper Manhattan. Even though it's the middle of the summer, he's delivering firewood. He
says even though fuel costs have doubled in the past year, it's still worth the premium he gets
delivering ash and cherry to the captive and growing market in NYC. Which of the following
statements is TRUE about short run costs for Angel?
A) His truck is a fixed cost and gasoline is a variable cost.
B) His truck is a variable cost and gasoline is a fixed cost.
C) Both his truck and gasoline is a variable cost.
D) Neither his truck nor gasoline is a variable cost.
Answer: A
Topic: Fixed Cost
Skill: Conceptual
delivering ash and cherry to the captive and growing market in NYC. How would a decrease in
gasoline prices affect Angel's short run costs?
A) Short run total costs would decrease.
B) Short run variable costs would increase.
C) Short run fixed costs would decrease.
D) Short run average variable costs would increase.
Answer: A
Topic: Total Cost
Skill: Conceptual
121
delivering ash and cherry to the captive and growing market in NYC. How does the doubling of
fuel costs affect Angel's short run costs?
A) Short run variable costs would increase.
B) Short run fixed costs would decrease.
C) Short run total costs would decrease.
D) Short run average fixed costs would increase.
Answer: A
Topic: Variable Cost
Skill: Conceptual
delivering ash and cherry to the captive and growing market in NYC. How would an increase in
Angel's salary affect short run costs?
Answer: A
Skill: Conceptual
10) Minneapolis business Rogue Chocolatier sells specialty chocolate bars with a high cocoa
content. The price of cocoa beans shot up 44 percent in 2008. How did this affect Rogue's short
run costs?
Answer: A
Skill: Conceptual
122
content. If Rogue's average total cost decreases as the business increases plant size, then Rogue
experiences
C) diminishing marginal returns.
D) constant returns to scale.
Answer: A
Skill: Conceptual
content. Most chocolate companies use already processed chocolate to craft their sweets. But
Rogue buys raw cocoa beans, and roasts and grinds them until they're in a liquid state and then
runs the chocolate through a big squat machine with rollers. Which statement is TRUE for
Rogue?
A) Raw cocoa beans are a variable factor of production and the machine is a fixed factor of
production.
B) Both processed chocolate and raw cocoa beans are variable factors of production.
C) Processed chocolate is a variable factor of production and the machine is a fixed factor of
production.
D) Processed chocolate and raw cocoa beans are variable factors of production and the machine
is a fixed factor of production.
Answer: A
Topic: Inputs, Fixed and Variable
Skill: Conceptual
content. Rogue can produce 15 chocolate bars per day with one employee, 35 with 2, 50 with 3
and 55 with 4 employees. Which statement is TRUE?
A) Rogue's marginal product curve initially increases and then decreases.
B) Rogue's marginal product curve decreases continually.
C) Rogue's total product curve increases at an increasing rate.
D) Rogue's marginal product curve decreases initially and then increases.
Answer: A
Topic: Marginal Product
Skill: Conceptual
123
content. Rogue can produce 15 chocolate bars per day with one employee, 29 with 2, 35 with 3
and 40 with 4 employees. Which statement is TRUE?
A) Rogue's marginal product curve decreases continually.
B) Rogue's marginal product curve initially increases and then decreases.
C) Rogue's total product curve increases at an increasing rate.
D) Rogue's marginal product curve decreases initially and then increases.
Answer: A
Topic: Marginal Product
Skill: Conceptual
15) Health care costs rose more than 10 percent in 2011, according to a survey of insurers by
Aon Consulting Worldwide. Which of the following would be a variable cost in a hospital?
A) nurses
B) An MRI machine
C) laboratory equipment
D) gurneys
Answer: A
Skill: Conceptual
Aon Consulting Worldwide. Which of the following would be a fixed cost in a hospital?
A) an MRI machine
B) bandages
C) nurses
D) syringes
Answer: A
Topic: Fixed Cost
Skill: Conceptual
Aon Consulting Worldwide. If the increase in costs solely comes from increased wages to nurses
and doctors, then for the health care industry
A) variable costs are increasing.
B) fixed costs are increasing.
C) long run average total cost is decreasing.
D) productivity is increasing.
Answer: A
Skill: Conceptual
124
Aon Consulting Worldwide. If the increase in costs solely comes from increased prices for MRI
and X-ray machines, then for the health care industry
A) fixed costs are increasing.
B) long run average total cost is decreasing.
C) productivity is increasing.
D) variable costs are increasing.
Answer: A
Topic: Fixed Cost
Skill: Conceptual
6 Essay Questions
1) What is the difference between the short run and the long run?
Answer: The short run is a time period so short that the firm cannot change the quantity of at
least one factor of production, say plant size for a manufacturer or land for a farmer. The only
way to increase output, therefore, is by combining more units of the variable factors of
production with the fixed factor of production. The long run is a time period sufficiently long
that a firm can change the quantity of all factors of production. In the long run, nothing is fixed
so output can be produced with whatever combination of factors of production the firm chooses.
Skill: Conceptual
AACSB: Written and oral communication
2) What factors of production can a firm change in the short run? In the long run?
Answer: In the short run, the firm can change its variable factors of production, such as labor.
The firm cannot change its fixed factors of production, such as its capital stock. The factors of
production the firm cannot change are called its "plant." In the long run, the firm can change all
of its factors of production. Indeed, the long run is defined as the period of time long enough so
that the firm can change all of its factors of production.
Skill: Conceptual
3) What do economists mean when they say that a firm's plant is fixed?
Answer: The phrase that a "firm's plant is fixed" refers to the fact that, in the short run, there are
some factors that are fixed, that is, the quantity employed cannot be changed. These factors of
production, which include factors such as the firm's capital and land, are collectively referred to
as the firm's plant.
Topic: Short Run
Skill: Conceptual
125
4) What does a firm's short-run total product curve show and what is its significance?
Answer: A short-run total product curve shows the way the maximum output increases when the
input of a variable factor of production (such as labor) increases, holding all other factors of
production fixed. Its significance is that it shows the productivity of the variable factor of
production as output is increased. The latter, in turn, is an important determinant of a firm's short
run costs.
Skill: Conceptual
5) What is the law of diminishing returns? Why is this proposition called a "law"?
Answer: The law of diminishing returns states that as a firm uses more of a variable factor, with
a given quantity of fixed factors, the marginal product of the variable factor eventually decreases.
This proposition is called a "law" because there is no case where adding more labor, capital,
materials, fuel or any other variable factor will cause output to increase indefinitely. Eventually,
adding any variable factor to some fixed factor will lead to smaller and smaller additions to
output. If the law of diminishing returns did not always hold true, farmers could grow the entire
world's supply of food on one acre of land, by just adding more water and more fertilizer
(variable factors) to the acre (the fixed factor).
Skill: Conceptual
6) "The law of diminishing returns is the same as the decreasing returns to scale." Do you agree?
Explain.
Answer: The statement is incorrect. The law of diminishing returns states that as a firm uses
more of a variable factor, with a given quantity of fixed factors, the marginal product of the
variable factor eventually diminishes. In the long run all factors are variable, and decreasing
returns to scale occurs when an increase in all factors by the same percentage results in a smaller
percentage increase in output.
Skill: Conceptual
7) What does the average product of labor equal?

Answer: The average product of labor equals the total product (the total output) divided by the
quantity of labor.
Skill: Conceptual
126
8) "If the marginal product of labor curve slopes downward, then the average product of labor
curve necessarily must slope downward." Explain whether the previous statement is correct or
incorrect?
Answer: The statement is incorrect. The relationship between the marginal product and average
product of labor is that when the marginal product of labor exceeds the average product of labor,
the average product of labor curve slopes upward and when the marginal product of labor is less
than the average product of labor, the average product of labor curve slopes downward. So, even
if the marginal product of labor curve slopes downward, as long as it is above the average
product of labor curve, the average product of labor curve slopes upward.
Topic: Relationship Between the Marginal & Average Product of Labor
Skill: Conceptual
9) Describe the relationship between the marginal and average products of labor as the
employment of labor increases in the short run.
Answer: Holding other factors such as capital constant, additional workers have increasing and
then diminishing marginal returns. So, the marginal product of additional workers rises and then
falls, even though remaining positive. As that happens, when the marginal product is greater than
the average product, the average product is increasing. When the marginal product is less than
the average product, the average product is decreasing. The average product equals the marginal
product when the average product is at its maximum.
Skill: Conceptual
10) A student wrote: "When the average product of labor exceeds the marginal product, the
marginal product is increasing." If you were the instructor, how would you correct this
statement?
Answer: There are several errors. The corrected sentence is "When the average marginal
product of labor exceeds the marginal average product, the marginal average product is
increasing."
Skill: Conceptual
11) What are the two components of a firm's total cost in the short run, and what are their
definitions?
Answer: The two parts are the total fixed cost (TFC) and the total variable cost (TVC). TFC is
the cost that does not vary as output varies. Examples include rent on a building or interest on a
business loan. TVC is the cost that varies as output varies. Examples include a firm's payroll for
labor or payments for raw materials.
Topic: Total Cost
Skill: Conceptual
127
12) Jake is a corn farmer in Nebraska. He rents his land on a long-term lease for $250,000 a year.
He pays his farm hands $28,000 a year. Is his rent a fixed cost or a variable cost? Are the wages
he pays his workers a fixed cost or a variable cost? Briefly explain your answers.
Answer: Jake's rent is a fixed cost. He is renting his land on a long-term lease and so the land is
a fixed factor. The wages Jake pays are a variable cost. Labor is a variable factor so the wages
are a variable cost.
Topic: Fixed Cost and Variable Cost
Skill: Conceptual
13) "In the short run, even when output is zero, the firm still has some variable costs it must
pay." Is the statement correct or incorrect? Briefly explain your answer.
Answer: The statement is incorrect. When output is zero, there are no variable costs because
there are no variable factors being employed. However, in the short run there might be fixed
factors of production, in which case the firm would still have some fixed costs it must pay.
Topic: Fixed Cost and Variable Cost
Skill: Conceptual
14) When plotted against the total output, what does the total fixed cost curve look like?
Answer: The total fixed cost curve is a horizontal straight line, indicating that at any level of
output the total fixed cost does not change as output changes.
Topic: Fixed Cost Curve
Skill: Conceptual
15) Explain why average total costs initially decrease and then increase as output increases.
Answer: Initially, as output increases, both average fixed cost and average variable cost
decrease. So, average total cost decreases at first. But as output increases further, diminishing
returns set in and average variable cost begins to increase. Eventually, average variable cost
increases more quickly than average fixed cost decreases, so average total cost increases.
Skill: Conceptual
128
16) Downsizing is the practice of laying off workers in an attempt to decrease average total cost.
Can laying off workers decrease average total cost? Is it possible for the firm to downsize and
have its average total cost increase? Explain your answer.
Answer: Yes, downsizing by laying off workers can decrease the firm's average total cost. And it
is possible for a firm to downsize and increase its average total cost. Suppose that the firm
initially is producing more output than the level that minimizes average total cost. In this case,
downsizing by laying off workers decreases the amount of output the firm produces and the firm
moves along its average total cost curve to a lower average total cost. However, the firm can lay
off too many workers. If it lays off too many workers, it decreases its output so much that it
moves along its average total cost curve enough that its average total costs wind up higher than
they were initially.
Topic: Average Total Cost Curve
Skill: Conceptual
17) How do we calculate average fixed cost and why does average fixed cost fall as output
increases?
Answer: Average fixed cost is calculated by dividing total fixed cost by the quantity of output.
Because total fixed cost stays the same for all levels of output, as the quantity produced
increases, the average fixed cost decreases.
Skill: Conceptual
18) "Marginal cost is the increase in total cost that results from a one-unit increase in a variable
input." True or false? Explain.
Answer: False. Marginal cost is the increase in total cost that results from a one-unit increase in
output, not a one unit increase in an input.
Skill: Conceptual
19) "Marginal cost eventually increases because of the law of diminishing returns." True or
false? Explain.
Answer: The statement is true. The law of diminishing returns means that each additional
worker produces a successively smaller addition to output. So to get an additional unit of output,
ever more workers are required. Because more workers are required to produce one additional
unit of output, the cost of the additional unit of outputmarginal costmust increase.
Skill: Conceptual
129
20) The average total cost curve is U-shaped. At the quantity of output where average total cost
is at its minimum, is the marginal cost curve above the average total cost curve, below the
average total cost curve, or intersecting the average total cost curve?
Answer: When the average total cost is at its minimum, the average total cost equals the
marginal cost. Therefore at the quantity of output where the average total cost is at its minimum,
the marginal cost curve intersects the average total cost curve.
Skill: Conceptual
21) What is the difference between average total cost and marginal cost and are they ever equal
to each other?
Answer: Average total cost is total cost divided by output. Marginal cost is the change in total
cost divided by the change in output. Marginal cost equals average total cost when the average
total cost is at its minimum.
Skill: Conceptual
22) Which average cost curves are U-shaped?

Answer: Both the average total cost and the average variable cost curves are U-shaped. The only
average cost curve that is not U-shaped is the average fixed cost curve.
Skill: Conceptual
23) What is the relationship between the marginal product of labor and the marginal cost?
Answer: Initially, as each additional unit of labor is employed, the marginal product of labor
increases. The cost of each worker is the samethe wage rate. Because each worker's cost is the
same, but each additional worker produces more output than the previous worker, the cost of
producing an additional unit of output decreases. The cost of producing an additional unit of
output is the marginal cost. Therefore when the marginal product of labor is increasing, the
marginal cost is decreasing. At some point, the marginal product of labor will reach a peak, at
which level of output marginal cost is minimized. After that point, the law of diminishing returns
means that the marginal product decreases. When the marginal product decreases, the marginal
cost increases; each worker costs the same to hire, but an additional worker produces less output
than the previous worker. Therefore when the marginal product of labor is decreasing, the
marginal cost is increasing.
Skill: Conceptual
130
24) Explain how new technologies, which increase productivity, affect the average variable cost,
average total cost, and marginal cost curves.
Answer: A technological change that increases productivity shifts the total product, average
product, and the marginal product curves upward. Because the new technologies enable existing
inputs to produce more output, this effect means that the average variable cost, average total cost,
and marginal cost curves shift downward, reflecting the decrease in average and marginal costs.
However, the new technologies often need to use more capital and less labor. In this case, the
firm's fixed cost increases and its variable cost decreases. The increase in fixed cost leads to an
increase in total cost while the decrease in variable cost leads to a decrease in total cost.
Although the net effect is ambiguous, generally the total cost increases at low levels of output
and decreases at higher levels of output. In this case, the average total cost curve shifts upward at
lower levels of output and shifts downward at higher levels of output.
Topic: Change in Technology
Skill: Conceptual
25) When the Rent-A-Limo Company negotiates its new labor contract it finds that the wages it
must pay drivers have increased. How does this wage hike affect the Rent-A-Limo Company's
average fixed cost, average variable cost, average total cost, and marginal cost?
Answer: The drivers' wages are a variable cost because the number of drivers needed varies with
how many limousines are rented. The increase in wages will have no effect on the average fixed
cost but the average variable cost will increase. The increase in average variable cost leads to an
increase in the average total cost and an increase in the marginal cost.
Skill: Conceptual
26) How do the marginal and average products of labor affect a firm's marginal and average
variable costs in the short run?
Answer: Over the range of output for which the marginal product is increasing, marginal cost is
decreasing and vice versa. At the level of output at which the marginal product is at its
maximum, marginal cost will be at its minimum. And, over the range of output for which the
average product is increasing, average variable cost is decreasing and vice versa. Finally, the
level of output at which the average product is at its maximum is the same level at which average
variable cost is at its minimum.
Topic: Relationship Between Cost Curves and Product Curves
Skill: Conceptual
27) In the long run all costs are variable costs. Why?
Answer: The long run is defined as the time frame over which all factors of production can be
varied. The costs of the variable factors of production are the variable costs. Taken together,
these definitions imply that in the long run all factors of production are variable factors of
production so all costs are variable costs.
Skill: Conceptual
131
28) Which curve shows the lowest average total cost at which it is possible to produce each
output when the firm has time to change both its labor force and plant size?
Answer: The long-run average cost curve shows the lowest average total cost at which it is
possible to produce each output when the firm has had time to change all its inputs.
Skill: Conceptual
29) What is the long-run average cost curve? What are the three ranges of output and in what
order do they occur? Briefly define each of the three ranges.
Answer: The long-run average cost curve shows the lowest average cost at which it is possible
to produce each output when the firm has time to change both its labor force and its plant size.
The long-run average cost curve is U-shaped and shows three possible production ranges. In
order, these ranges are: economies of scale, constant returns to scale, and diseconomies of scale.
Economies of scale are when a firm increases its plant size and labor employed by the same
percentage and its output increases by a larger percentage so that its average total cost decreases.
Constant returns to scale are when a firm increases its plant size and labor employed by the same
percentage and its output increases by the same percentage so that its average total cost does not
change. And, diseconomies of scale are when a firm increases its plant size and labor employed
by the same percentage and its output increases by a smaller percentage so that its average total
cost increases.
Skill: Conceptual
30) What are economies of scale? What is the main source of economies of scale?
Answer: Economies of scale are when a firm increases its plant size and labor employed by the
same percentage and its output increases by a larger percentage so that its average total cost
decreases. Economies of scale result because of specialization. When a firm increases its capital
stock, the capital can be more specialized and hence produce more output than less specialized,
more generalized capital. Similarly, when a firm increases its labor force, it can hire more
specialists, each of whom is better at doing his or her assigned task than a less specialized
individual. As a result of specialization, the firm's average product increases so that its average
total cost decreases.
Skill: Conceptual
132
31) Explain the difference between increasing marginal returns and economies of scale.
Answer: Increasing marginal returns apply to the case where a firm has increased only the
amount of labor it uses while keeping capital fixed. If increasing marginal returns occur, an
additional worker is more productive than the previous worker hired. In this case, the marginal
product of the new worker exceeds the marginal product of the previous worker. Economies of
scale apply when a firm increases both the amount of labor it uses and the amount of capital it
uses. If there are economies of scale, when a firm increases labor and capital by the same
percentage, its output increases by a larger percentage.
Topic: Increasing Marginal Returns and Economies of Scale
Skill: Conceptual
32) What are diseconomies of scale and why might they occur?
Answer: Diseconomies of scale mean that as the firm increases all its inputs by the same
percentage, its output increases by a smaller percentage. As a result, the firms' long-run average
cost rises. Diseconomies of scale can arise from the sheer size of a firm. As a firm grows larger,
it becomes increasingly more difficult to manage. Communicating information up and down the
management hierarchy as well as communicating between managers and workers on the same
level becomes more costly. As a result, the firm experiences diseconomies of scale, that is, its
long-run average cost increases as it expands the scale of its operation by producing yet more
output.
Skill: Conceptual
33) A firm increases both its plant and its labor force by the same percentage and its average total
costs remain unchanged. Is the firm experiencing increasing returns to scale, constant returns to
scale, or decreasing returns to scale?
Answer: The firm is experiencing constant returns to scale.
Skill: Conceptual
133
34) Are the short-run average total cost curve and the long-run average cost both U-shaped for
the same reasons? If so, carefully explain these reasons. If not, explain why each curve is U-
shaped.
Answer: The curves are U-shaped for quite different reasons. In the short run, the firm's plant,
that is, its capital, is fixed. Therefore the only way to increase output is by increasing the quantity
of the variable factor, labor. Initially as labor increases, there are gains from specialization and
division of labor, which leads the marginal product to rise and the average total cost to fall as
more workers are employed. Eventually, however, the firm runs up against its capital constraint
and workers must share tools and building space. As this happens, decreasing marginal returns
begin and average total cost eventually begins to rise.
In the long run, both labor and capital are variable. As a firm expands its use of both factors,
gains from specialization of both labor and capital cause average total costs to fall. Eventually,
however, the business becomes so large it is difficult to coordinate and control. When this
happens, average total cost begins to rise. So, the short-run average total cost is U-shaped
because more workers must make do with the same amount of plant. The long-run average cost
curve is U-shaped because the very scale of the firm's operations makes it difficult to control
efficiently and effectively.
Topic: Short-Run and Long-Run Average Cost Curves
Skill: Conceptual
35) What is the difference between diminishing marginal returns and diseconomies of scale?
Answer: Diminishing marginal returns is a short run concept. It occurs when increases in output
become smaller and smaller as more units of a variable factor are combined with some fixed
factor. Diseconomies of scale is a long run concept. It occurs when, as output increases, long-run
average cost increases.
Topic: Diseconomies of Scale Versus Diminishing Marginal Returns
Skill: Conceptual
134
7 Numeric and Graphing Questions
Total product
Quantity of labor
(lawns mowed per
(workers)
day)
0 0
1 3
2 8
3 15
4 20
5 21
1) The above table has the total product schedule for Jesse's Lawn Service.
a) In the figure, label the axes and then graph the total product curve.
b) Find the average product for the different amounts of employment.
135
Answer:
a) The figure graphs the total product curve.

b) The average product when 1 worker is employed is 3 lawns mowed per day; when 2 workers
are employed, it is 4 lawns per day; when 3 workers are employed, it is 5 lawns per day; when 4
workers are employed, it is 5 lawns per day; and when 5 workers are employed, it is 4.2 lawns
per day.
Skill: Graphing
136
Quantity of
Average Marginal
labor Total product
product product
(workers)
0 0 ____
1 24 ____ ____
2 50 ____ ____
3 74 ____ ____
4 94 ____ ____
5 110 ____ ____
6 122 ____ ____
7 130 ____ ____
8 134 ____ ____
9 134 ____
2) Ajax Manufacturing has a fixed scale of plant with the levels of total product given in the table
for different levels of labor. Complete the table by calculating the average product and marginal
product.
Answer:
Quantity of
Average Marginal
labor Total product
product product
(workers)
0 0 24
1 24 24.0 26
2 50 25.0 24
3 74 24.7 20
4 94 23.5 16
5 110 22.0 12
6 122 20.3 8
7 130 18.6 4
8 134 16.8 0
9 134 14.9
The completed table is above.

Skill: Analytical
137
Quantity of labor Total product
(workers) (hair stylings per day)
0 0
1 10
2 25
3 45
4 60
5 70
3) The above table shows the total product schedule for Hair Today, a hair styling salon.
a) What is the first worker's marginal product? The second worker? The third worker? The
fourth worker? The fifth worker?
b) Over what range of workers is there increasing marginal returns? Over what range is there
decreasing marginal returns?
Answer:
a) The first worker's marginal product is 10 hair stylings. The second worker's marginal product
is 15 hair stylings. The third worker's marginal product is 20 hair stylings. The fourth worker's
marginal product is 15 hair stylings. The fifth worker's marginal product is 10 hair stylings.
b) There are increasing marginal returns for the first 3 workers. After the third worker, there are
decreasing marginal returns.
Skill: Analytical
138
Total product
Labor (shirts per
(workers) day)
0 0
1 20
2 36
3 48
4 56
5 60
4) The table above shows Randy's Shirts' short-run production function. Randy hires workers at a
wage rate of $50 a day and his total fixed cost is $100.
a) What is the marginal product of the 3rd worker?
b) What is Randy's average fixed cost if 48 shirts are produced?
c) What is Randy's average variable cost if 56 shirts are produced?
d) What is Randy's marginal cost of producing the 52nd sweater?
e) What is Randy's average total cost if 48 sweaters are produced?
Answer:
a) When the 3rd worker is hired, output increases from 36 to 48, an increase of 12 shirts per
day. So the marginal product of the 3rd worker is 12 shirts per day.
b) Average fixed cost is total fixed cost divided by the output produced. Total fixed cost is $100,
so Randy's average fixed cost is $100/48, which is $2.08 per shirt.
c) Average variable cost is total variable cost divided by the output produced. To produce 56
shirts, Randy needs 4 workers. So Randy's total variable cost is $50 4, which is $200. Then, his
average variable cost is $200/56, which is $3.57 per shirt.
d) The 52nd sweater is produced when the 4th worker is hired and the output increases from 48
to 56 shirts. The marginal cost of producing these additional 8 shirts is the cost of employing the
additional worker, $50. So the marginal cost of producing the 52nd shirt is $50/8 = $6.25.
Alternatively, the total cost of producing 48 shirts is $100, the fixed cost, plus 3 $50, the
variable cost, which is $250. And the total cost of producing 56 shirts is $100, the fixed cost, plus
4 $50, the variable cost, which is $300. Then the marginal cost equals the change in the total
cost divided by the change in output, or $50/8, which is $6.25.
e) Average total cost is total cost divided by the output produced. Total cost is fixed cost plus
variable cost. Randy's fixed cost is $100. To produce 48 shirts, he needs 3 workers, so his total
variable cost is $50 3 = $150. Randy's total cost is $100 + $150 = $250. Then his average total
cost is $250/48, which is $5.21.
Topic: Total Product and Costs
Skill: Analytical
139
(workers) (widgets per day)
0 0
1 5
2 15
3 35
4 50
5 60
6 65
Total product
(widgets per
day) TFC TVC TC
0
5
15
35
50
60
65
Total product
(widgets per
day) AFC AVC ATC MC
0
5
15
35
50
60
65
5) The first table above has the total product schedule for an imaginary good called a widget.
Each unit of labor costs $25 and the total cost of capital is $100.
a) Use this information to complete the remaining two tables. In the tables, TFC is the total
fixed cost, TVC is the total variable cost, TC is the total cost, AFC is the average fixed cost, AVC
is the average variable cost, ATC is the average total cost, and MC is the marginal cost.
140
(workers) (widgets per day)
0 0
1 5
2 15
3 35
4 50
5 60
6 65
Total product
(widgets per
day) TFC TVC TC
0
5
15
35
50
60
65
b) Suppose that labor becomes twice as expensive (so that one unit of labor now costs $50) but
nothing else changes. Complete the above tables with the new cost schedules. If you plotted the
cost curves, how would the increased wage rate affect the cost curves?
Answer:
Total product
TFC TVC TC
(widgets per day)
0 100 0 100
5 100 25 125
15 100 50 150
35 100 75 175
50 100 100 200
60 100 125 225
65 100 150 250
Total product
AFC AVC ATC MC
(widgets per day)
0
5 20.00 5.00 25.00 5.00
15 6.67 3.33 10.00 2.50
35 2.86 2.14 5.00 1.25
50 2.00 2.00 4.00 1.67
60 1.67 2.08 3.75 2.50
65 1.54 2.31 3.85 5.00
141
a) The completed tables are above. All the costs in dollars.
Total product
TFC TVC TC
(widgets per day)
0 100 0 100
5 100 50 150
15 100 100 200
35 100 150 250
50 100 200 300
60 100 250 350
65 100 300 400
Total product
AFC AVC ATC MC
(widgets per day)
0
5 20.00 10.00 30.00 10.00
15 6.67 6.67 13.33 5.00
35 2.86 4.29 7.14 2.50
50 2.00 4.00 6.00 3.33
60 1.67 4.17 5.83 5.00
65 1.54 4.62 6.15 10.00
b) The completed tables are above. All the costs are in dollars. There would be no change in the
total fixed and average fixed cost curves because the fixed cost did not change. The total cost,
total variable cost, average total cost, average variable cost, and marginal cost curves would all
shift upward.
Topic: Short Run Costs
Skill: Analytical
6) This month, the local widget factory produced 100 widgets. The total variable cost of
production was $500 and the average total cost of production was $8.
a) What is the total cost?
b) What is the total fixed cost?
c) What is the average fixed cost?
d) What is the average variable cost?
Answer:
a) Total cost can be calculated as average total cost times output, which is $8 100 = $800.
b) Total fixed cost equals total cost minus total variable cost. The total cost from part (a) is
$800. The total variable cost is $500. Therefore the total fixed cost is $800 - $500 = $300.
c) Average fixed cost equals total fixed cost divided by output, which is $300/100 = $3.
d) Average variable cost equals total variable cost divided by output. The total variable cost
from part (b) is $500, so the average variable cost is $500/100 = $5.
Skill: Analytical
142
Output
Total cost
(oil changes per
(dollars per hour)
hour)
0 10
1 20
2 35
3 50
4 80
7) The above table gives the total cost schedule for oil changes at the local Jiffy Lube.
a) What is Jiffy Lube's total fixed cost?
b) What is the total variable cost of 2 oil changes?
c) What is the average variable cost of 4 oil changes?
d) What is the average fixed cost of 2 oil changes?
e) What is the marginal cost of the 3rd oil change?
Answer:
a) The total fixed cost is $10. At zero output, the total variable cost is $0, so the entire cost, $10,
must be the fixed cost.
b) The total variable cost of 2 oil changes is $25. The total cost, TC, is $35 and from part (a) the
total fixed cost, TFC, is $10. The total variable cost, TVC, is equal to TC - TFC or $35 - $10 =
$25.
c) The average variable cost for 4 oil changes is $17.50. Start similarly to part (b) by calculating
that the total variable cost, TVC, for 4 oil changes is $70. Then, the average variable cost, AVC,
equals the total variable cost divided by output, or TVC Q. In this case, the AVC is equal to $70
4 = $17.50.
d) The average fixed cost of 2 oil changes is $5. The average fixed cost, AFC, equals the total
fixed cost divided by output, or TFC Q. From part (a), the total fixed cost is $10, so the
average fixed cost equals $10 2 = $5.
e) The marginal cost is $15. Marginal cost is defined as the change in the total cost that results
from a one-unit increase in output. The total cost of 2 oil changes is $35 and the total cost of 3 oil
changes is $50. Therefore the change in the total cost is $15, which is the marginal cost.
Skill: Analytical
143
8) Draw an average total cost curve, an average variable cost, and a marginal cost curve all on
the same graph. Make sure to correctly label the axes. What relationship must exist between the
marginal cost curve and the average total cost and average variable cost curves?
Answer:
Typical cost curves are above. The average variable cost curve, AVC, and average total cost
curve, ATC, are U-shaped. The marginal cost curve, MC, intersects the AVC curve and ATC curve
at their minimum points.
Skill: Graphing
144
9) Are the curves in the figure above drawn CORRECTLY? If not, what's wrong?
Answer: The curves are not drawn correctly. First, the marginal cost curve must intersect the
average variable cost curve and the average total cost curve where they are at their minimums,
which is not the case in the figure. Second, the vertical distance between the ATC curve and the
AVC curve is the AFC, which decreases as output increases. So the vertical distance between the
ATC curve and the AVC curve should shrink in size, which is not the case in the figure.
Skill: Graphing
145
10) Suppose the local newspaper hires students to fold and bag newspapers for delivery and pays
them $20 per shift. Five students can fold and bag 300 newspapers per shift. The fourth student
added 50 newspapers to total output. The capital cost is fixed at $50 per shift.
a) Is the newspaper operating in the long run or short run? Why?
b) What is the average product of 5 students?
c) Calculate the total fixed, total variable, and total costs of folding and bagging 300
newspapers.
d) Calculate the average fixed, average variable, and average total costs of folding and bagging
300 newspapers.
e) What is the marginal cost of one of the 50 newspapers folded and bagged by the fourth
student?
Answer:
a) The firm is operating in the short run because its capital cost is fixed.
b) Average product equals 300 5 = 60 newspapers per shift.
c) Total fixed cost = $50, total variable cost = 5 $20 = $100, and so total cost = $50 + $100 =
$150.
d) Average fixed cost = $50 300 = $0.17, average variable cost = $100 300 = $0.33, and
average total cost = $150 300 = $0.50 (alternatively, average total cost = average fixed cost +
average variable cost = $0.17 + $0.33 = $0.50).
e) Marginal cost = change in total cost divided by change in output, or $20 50 = $0.40.
Skill: Analytical
146
Total cost Average cost
Year Total product
(dollars) (dollars)
1 100 1,000 ___
2 240 2,000 ___
3 500 4,000 ___
4 1,000 8,000 ___
5 1,800 16,000 ___
6 2,500 32,000 ___
11) Jones Production started business with a small scale plant. Fortunately for Smith, the owner
of Jones Production, the business grew rapidly. It doubled its plant scale and its labor force every
year for the next six years. The table above gives the total costs and the associated total products
for each year.
a) Complete the table by finding the average cost for each scale.
b) Over what range of total product (output) did Jones Production experience economies of
scale, constant returns to scale, and diseconomies of scale?
Answer:
Total cost Average cost
Year Total product
(dollars) (dollars)
1 100 1,000 10.00
2 240 2,000 8.33
3 500 4,000 8.00
4 1,000 8,000 8.00
5 1,800 16,000 8.88
6 2,500 32,000 12.80
a) The completed table is above.

b) There are economies of scale from 100 to 500 units of total product, constant returns to scale
from 500 to 1,000 units of total product, and diseconomies of scale from 1,000 to 2,500 units of
total product.
Skill: Analytical
147
12) Ayanna grows herbs. Last year she grew 2,000 pounds of herbs in a year while using 250
square feet of land and 1 worker. This year she doubled her land to 500 square feet, doubled her
workers to 2, and grew 4,500 pounds of herbs. She sells her rare, organic herbs for $50 a pound.
She pays her workers $25,000 a year and rents her land for $100 per square foot for a year. These
are her only costs.
a) What was Ayanna's total cost last year and this year?
b) What was Ayanna's average total cost last year and this year?
c) Did Ayanna experience economies or diseconomies of scale?
Answer:
a) Ayanna's total cost last year was $50,000 and her total cost this year is $100,000.
b) Ayanna's average total cost last year was $25 a pound and her average total cost this year is
$22.22 a pound.
c) Ayanna's average total cost decreased so she experienced economies of scale.
Skill: Analytical
148
13) The above figure represents the average total cost curves of a wheat farmer.
a) Which average total cost curve has the lowest average total cost of producing 30,000 bushels
of wheat?
b) Over what range of output is the farmer experiencing economies of scale?
c) Over what range of output is the farmer experiencing diseconomies of scale?
d) Which average total cost curve has the lowest possible average cost of production?
e) Which average total cost curve represents the largest plant?
Answer:
a) ATC3 has the lowest average total cost to produce 30,000 bushels of wheat.
b) The farmer is experiencing economies of scale between 0 to 30,000 bushels of wheat.
c) The farmer is experiencing diseconomies of scale for more than 30,000 bushels of wheat.
d) ATC3 has the lowest possible average total cost, which occurs at 30,000 bushels of wheat.
e) ATC4 represents the largest plant.
Skill: Graphing
8 True or False
1) All the production points that lie above the total product curve are inefficient.
Answer: FALSE
Skill: Conceptual
149
2) The marginal product of labor is defined as the increase in output attributable to the last
worker hired divided by the total number of workers employed.
Answer: FALSE
Skill: Conceptual
3) When there are diminishing marginal returns to labor, the marginal product of the last worker
hired must be negative.
Answer: FALSE
Skill: Conceptual
4) When the marginal product of labor exceeds the average product of labor, the average product
must increase when employment increases.
Answer: TRUE
Skill: Conceptual
5) When the marginal product of labor is below the average product of labor, the average product
must increase when employment increases.
Answer: FALSE
Skill: Conceptual
6) A firm's total cost in the short run is the sum of its fixed cost plus its variable cost plus its
marginal cost.
Answer: FALSE
Topic: Total Cost
Skill: Conceptual
7) The term "fixed cost" refers to the cost a firm incurs to produce a specific fixed quantity of
output.
Answer: FALSE
Topic: Fixed Cost
Skill: Conceptual
8) In the short run, average fixed cost is constant as output increases.

Answer: FALSE
Topic: Fixed Cost
Skill: Conceptual
150
9) Marginal cost refers to the increase in cost attributable to hiring one more unit of labor,
capital, or some other input.
Answer: FALSE
Skill: Conceptual
10) The vertical distance between the average variable cost curve and the average total cost curve
equals average fixed cost.
Answer: TRUE
Topic: Average Cost Curves
Skill: Conceptual
11) The marginal cost curve intersects the average fixed, average variable, and average total cost
curves all at their minimum points.
Answer: FALSE
Topic: Marginal Cost Curve/Avg. Variable/Avg. Total Cost Curves
Skill: Conceptual
12) When marginal cost is greater than average cost, average cost decreases as output increases.
Answer: FALSE
Topic: Marginal Cost Curve/Avg. Variable/Avg. Total Cost Curves
Skill: Conceptual
13) Over the range of output for which the average product of labor curve is negatively sloped,
the average variable cost curve is positively sloped.
Answer: TRUE
Skill: Conceptual
14) Over the range of output for which the marginal product of labor curve is negatively sloped,
the marginal cost curve is negatively sloped.
Answer: FALSE
Skill: Conceptual
15) In the long run, total fixed cost equals zero.

Answer: TRUE
Topic: Long Run Costs
Skill: Conceptual
151
16) In the long run, total variable cost is zero.
Answer: FALSE
Skill: Conceptual
17) A firm's minimum efficient scale is the largest quantity of output at which long-run average
cost reaches its highest level.
Answer: FALSE
Skill: Conceptual
18) When a firm's long-run average cost is constant as output increases, the firm is experiencing
constant returns to scale.
Answer: TRUE
Skill: Conceptual
19) Diminishing marginal returns and diseconomies of scale are two different names for the
same thing.
Answer: FALSE
Skill: Conceptual
20) The long-run average cost curve is the relationship between the highest attainable average
total cost and output when both the plant size and labor are varied.
Answer: FALSE
Skill: Conceptual
21) A firm's long-run average cost curve is derived from a series of short-run average total cost
curves.
Answer: TRUE
Skill: Conceptual
152
22) A firm's long-run average cost curve is derived by adding together its short-run average total
cost curves.
Answer: FALSE
Skill: Conceptual
153
9 Extended Problems
Output (pizzas per day)

Labor
(workers) Plant 1 Plant 2 Plant 3 Plant 4
1 8 11 13 14
2 18 22 24 25
3 26 30 33 35
4 31 36 40 43
5 34 40 45 50
6 35 42 48 54
7 33 40 47 54
Ovens 1 2 3 4
1) Tony's Pizza's production function is shown in the table above.

a) Suppose Tony operates Plant 2. He hires 2 workers and produces 20 pizzas a day. Is the
pizzeria technologically efficient? Why or why not?
b) Suppose Tony operates Plant 1. He hires 2 workers and produces 18 pizzas per day. Is Tony's
Pizza technologically efficient? Why or why not? Can Tony increase production to 22 pizzas a
day in the short run? If yes, how?
c) Suppose Tony operates Plant 3. What is the marginal product of labor when the fourth worker
is hired? When operating Plant 3, does Tony experience diminishing marginal returns? Explain.
d) Suppose Tony currently uses Plant 3. Can he increase production from 40 to 50 pizzas per
day in the short run? In the long run? If yes, how?
Answer:
a) The firm is not technologically efficient. The production function shows that with 2 ovens
and 2 workers it is possible to produce 22 pizzas a day.
b) Tony's Pizza is technologically efficient. The production function shows that 18 pizzas is the
maximum output that 2 workers can produce with 1 oven. Tony can increase production to 22
pizzas per day in the short run by hiring more labor.
c) When the 4th worker is hired, the marginal product of labor is the change in output, 40 pizzas
- 33 pizzas = 7 pizzas, divided by the change in the labor input, 1 worker. So the marginal
product of labor for the 4th worker is 7 pizzas per day. Tony experiences diminishing marginal
returns because the marginal product of labor diminishes as more workers are hired.
d) If Tony uses Plant 3, he cannot increase production from 40 to 50 pizzas per day in the short
run. The short-run production function for Plant 3 shows that the maximum output that the firm
can produce with this plant is 48 pizzas per day. In the long run, however, Tony can increase his
output to 50 pizzas per day by increasing his plant size to 4 ovens (Plant 4) and hiring 5 workers.
Topic: Costs
Skill: Analytical
154
2) Tony's Pizza's production function is shown in the table above. Tony currently operates Plant
1. He hires workers at a wage rate of $50 a day and his total fixed cost is $100.
a) Calculate Tony's Pizza's total variable cost and total cost for each output level.
b) Calculate Tony's marginal costs.
c) Calculate the average fixed costs, average variable costs, and average total costs.
d) Draw Tony's marginal, average variable, and average total cost curves in one figure. What is
the relationship between marginal cost and average cost?
Answer:
Output TVC TC MC AFC AVC ATC
Labor
(pizzas (dollars (dollars (dollars (dollars (dollars (dollars
(workers)
per day) per day) per day) per day) per day) per day) per day)
0 0 0 100
6.25
1 8 50 150 12.50 6.25 18.75
5.00
2 18 100 200 5.56 5.56 11.11
6.25
3 26 150 250 3.85 5.77 9.62
10.00
4 31 200 300 3.23 6.45 9.68
16.67
5 34 250 350 2.94 7.35 10.29
50.00
6 35 300 400 2.86 8.57 11.43
a) The total variable cost and total cost for each level of output are in the table above.
b) The firm's marginal costs are shown in the table above.
c) The firm's average fixed costs, average variable costs, and average total costs are shown in
the table above.
155
d) The figure above has the cost curves. The marginal cost curve intersects both the average
total cost and the average variable cost curves at the minimum point on each curve. When the
marginal cost is below the average cost, the average cost is decreasing. When the marginal cost is
above the average cost, the average cost is increasing. Because ATC = AFC + AVC, it is the case
that AFC = ATC - AVC, so that the average fixed cost is the vertical distance between the ATC
and AVC curves.
Topic: Costs
Skill: Analytical
3) Tony's Pizza's production function is shown in the table above. Tony currently operates Plant
2. He hires workers at a wage rate of $50 a day and his total fixed cost is $150.
a) Calculate Tony's Pizza's total variable cost and total cost for each output level.
b) Calculate the marginal costs.
c) Calculate the average fixed costs, average variable costs, and average total costs.
d) Suppose that total fixed cost increases to $200. Explain what changes occur in the costs.
Answer:
Output TVC TC MC AFC AVC ATC
Labor
(pizzas (dollars (dollars (dollars (dollars (dollars (dollars
(workers)
per day) per day) per day) per day) per day) per day) per day)
0 0 0 150
4.55
1 8 50 200 13.64 4.45 18.18
4.55
2 18 100 250 6.82 4.55 11.36
6.25
3 26 150 300 5.00 5.00 10.00
8.33
4 31 200 350 4.17 5.56 9.72
12.50
5 34 250 400 3.75 6.25 10.00
25.00
6 35 300 450 3.57 7.14 10.71
a) The total variable cost and total cost for each level of output are in the table above.
b) The firm's marginal costs are shown in the table above.
c) The firm's average fixed costs, average variable costs, and average total costs are shown in
the table above.
d) The increase in total fixed cost raises the average fixed costs and average total costs.
However, the increase in the fixed costs has no effect on the average variable cost or the
marginal cost. So, the ATC and AFC curves shift upward, but the AVC and MC curves do not
change.
Topic: Costs
Skill: Analytical
156
4) Tony's Pizza's production function is shown in the table above. Tony hires workers at a wage
rate of $50 a day and his total fixed cost is $100 for Plant 1 and $150 for Plant 2.
a) Calculate Tony's Pizza's average total costs for Plant 1. Draw the short-run average total cost
curve.
b) Calculate average total costs for Plant 2. Draw the short-run average total cost curve on the
same figure that you used for part a.
c) In the figure, illustrate Tony's long-run average cost curve.
d) If Tony wants to produce 34 pizzas per day, what plant size should he choose? Over what
output range is it efficient to operate Plant 1?
Answer:
Output ATC for Plant 1
(pizzas per day) (dollars per day)
8 18.75
18 11.11
26 9.62
31 9.68
34 10.29
35 11.43
a) The table above shows Tony's short-run average total costs for Plant 1. The figure shows this
short-run aver-age total cost curve, labeled ATC1. (The ATC curve is shaded both black and
gray.)
157
Output ATC for Plant 1
(pizzas per day) (dollars per day)
11 18.18
22 11.36
30 10.00
36 9.72
40 10.00
42 10.71
b) The table above shows Tony's short-run average total costs for Plant 2. The figure shows this
short-run aver-age total cost curve, labeled ATC2. (The ATC curve is shaded both black and
gray.)
c) The figure above shows Tony's long-run average total cost curve, the curve shaded black and
made up of part of the ATC1 curve and the ATC2 curve. For each level of output, the long-run
average cost curve shows the lowest attainable average cost of production.
d) If Tony produces 34 pizzas per day operating Plant 1, his average total cost is $10.29. If he
operates Plant 2, the ATC is below $10 (see the figure). Therefore Tony should choose Plant 2. It
is efficient to operate the plant that has the lowest average total cost of a pizza. Plant 1 is
efficient as long as the output does not exceed 33 pizzas per day.
Skill: Analytical
158

Chapter 11

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Chapter 11

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Microeconomics, 12e , Global Edition (Parkin)

Chapter 11 Output and Costs

1 Decision Time Frames

2) The short run is a period of time in which

3) The short run is a period of time in which

6) The short run is a time frame in which

7) In the short run

8) In the short run

10) The short run is a time frame in which

11) An example of a variable factor of production in the short run is

16) The long run is a time frame in which

18) In the long run, a firm has

19) The long run

20) The long run is a period of time in which

22) In the long run, a firm can vary

26) The long run is a time period in which

27) Which of the following statements is CORRECT?

2 Short-Run Technology Constraint

3) Points on a firm's total product curve are

7) Most total product curves have

8) The marginal product of labor is equal to the

12) The marginal product of labor is the

15) Average product equals the

16) Average product of labor is equal to ________.

17) The average product of labor is

30) In the above table, the average product of three workers is

Labor Total product

42) In the figure above, ________ is a technologically efficient point.

43) In the above figure, a technologically inefficient point is

44) In the above figure, an unattainable point is

52) In general, increasing marginal returns occur

54) "Diminishing marginal returns" refer to a situation in which the

55) A firm's total product curve shows that at first it has

56) Diminishing marginal returns to labor occur because

58) Diminishing marginal returns occur when

59) The law of diminishing returns states that as

63) The law of diminishing returns occurs because

Labor Total product

Labor Total product

97) Which of the following statements is TRUE?

107) The marginal product and average product curves

112) Diminishing marginal returns occurs when

Labor Total product

2) Total cost is equal to the

3) Which of the following statements is CORRECT?

4) A firm has fixed costs

6) A firm's total fixed cost (TFC) is a cost

7) Total fixed cost

11) Total variable cost is the sum of all

12) A firm's total variable cost (TVC) is defined as a cost that

Labor Total fixed Total variable Total cost

22) Marginal cost is equal to

25) Marginal cost is calculated as

26) Marginal cost ________ as the quantity produced is increased.

31) As output increases, marginal cost will eventually

33) As output increases, average fixed cost

37) Average variable cost is equal to

39) The average total cost curve

41) Average total costs are

72) The above table shows a firm's

Quantity Total variable

Output Total cost Total variable cost

100) In the above table, the total fixed cost is

115) In the above figure, the total cost curve is curve