Chapter 10 Problem Set for ECON 2420 Principles of Microeconomics

Technology, Production, and Costs

1) A firm has successfully adopted a positive technological change when
A) it can produce more output using the same inputs.
B) it produces less pollution in its production process.
C) can pay its workers less yet increase its output.
D) it sees an increase in worker productivity.

2) A firms cost of production is determined by all of the following except
A) the technology used to produce its output.
B) the productivity of its workers.
C) the cost of raw material used in production.
D) the amount of corporate taxes it must pay on its profit.

3) The difference between technology and technological change is that
A) technology refers to the processes used by a firm to transform inputs into output while
technological change is a change in a firms ability to produce a given level of output with
a given quantity of inputs.
B) technology is carried out by firms producing physical goods but technological change is an
intellectual exercise into seeking ways to improve production.
C) technology is product-centered, that is, developing new products with our limited
resources while technological change is process-centered in that it focuses on developing
new production techniques.
D) technology involves the use of capital equipment while technological change requires the
use of brain power.

4) A characteristic of the long run is
A) there are fixed inputs.
B) all inputs can be varied.
C) plant capacity cannot be increased or decreased.
D) there are both fixed and variable inputs

5) Which of the following is a factor of production that generally is fixed in the short run?
A) raw materials
B) labor
C) a factory building
D) water

6) Which of the following is an example of a long run adjustment?
A) Your university offers Saturday morning classes next fall.
B) Ford Motor Company lays off 2,000 assembly line workers.
C) A soybean farmer turns on the irrigation system after a month long dry spell.
D) Wal-Mart builds another Supercenter.

7) If a producer is not able to expand its plant capacity immediately, it is
A) bankrupt.
B) operating in the long run.
C) operating in the short run.
D) losing money.

8) Economic costs of production differ from accounting costs in that
A) economic costs include expenditures for hired resources while accounting costs do not.
B) economic costs add the opportunity costs of a firm using its own resources while
accounting costs do not.
C) accounting costs include expenditures for hired resources while economic costs do not.
D) accounting costs are always larger than economic cost.

9) Which of the following is an implicit cost of production?
A) interest paid on a loan to a bank
B) wages paid to labor plus the cost of carrying benefits for workers
C) the utility bill paid to water, electricity, and natural gas companies
D) rent that could have been earned on a building owned and used by the firm

10) The explicit cost of production is also called
A) variable cost.
B) accounting cost.
C) direct cost.
D) overhead cost.

11) Which of the following would be categorized as an opportunity cost?
a. not being able to spend your $10,000 savings if you sink the money in your business
b. the cost of purchasing supplies for your house-cleaning business
c. the cost of purchasing auto insurance for your dry-cleaning delivery business
A) a only
B) a and c only
C) b and c only
D) all of the above

12) The production function shows
A) the total cost of producing a given quantity of output.
B) the maximum output that can be produced from each possible quantity of inputs.
C) the technology used to produce output.
D) the incremental output gained by improving the production process.

13) The average total cost of production
A) is the extra cost required to produce one more unit.
B) equals the explicit cost of production.
C) equals total cost of production divided by the level of output.
D) equals total cost of production multiplied times the level of output.

14) Vipsanas Gyros House sells gyros. The cost of ingredients (pita, meat, spices, etc.) to make a
gyro is $2.00. Vipsana pays her employees $60 per day. She also incurs a fixed cost of $120 per
day. Calculate Vipsanas total cost per day when she produces 50 gyros using two workers?
A) $100
B) $124.40
C) $220
D) $340




15) Vipsanas Gyros House sells gyros. The cost of ingredients (pita, meat, spices, etc.) to make a
gyro is $2.00. Vipsana pays her employees $60 per day. She also incurs a fixed cost of $120 per
day. What is Vipsanas total cost per day when she does not produce any gyros and does not
hire any workers?
A) $0
B) $2
C) $60
D) $120

16) The marginal product of labor is defined as
A) the additional sales revenue that results when one more worker is hired.
B) the additional output that results when one more worker is hired, holding all other
resources constant.
C) the additional number of workers required to produce one more unit of output.
D) the cost of hiring one more worker.

17) If four workers can produce 18 chairs a day and five can produce 20 chairs a day, the marginal
product of the fifth worker is
A) 2 chairs.
B) 3 chairs.
C) 4 chairs.
D) 38 chairs.

18) Red Stone Creamery currently hires 5 workers. When it added a 6th worker, its output actually
fell. Which of the following statements is true?
A) The marginal product of the sixth worker must be negative.
B) The average product of the sixth worker is negative.
C) The sixth worker is not as skilled as the fifth worker.
D) The total product becomes negative.

19) The law of diminishing marginal returns states
A) that at some point, adding more of a fixed input to a given amount of variable inputs will
cause the marginal product of the variable input to decline.
B) that at some point, adding more of a variable input to a given amount of a fixed input will
cause the marginal product of the variable input to decline.
C) that in the presence of a fixed factor, at some point average product of labor starts to fall as
more and more variable inputs are added.
D) average total costs of production initially fall and after some point starts to rise at a
decreasing rate as output increases.


20) The law of diminishing marginal returns
A) explains why the average total cost and marginal cost curves are U-shaped in the short
run.
B) explains why the average total cost, average fixed cost and the marginal cost curves are
U-shaped in the short run.
C) causes average total costs to rise at a decreasing rate as output increases.
D) causes the difference between average total cost and average variable cost to get smaller as
output increases.


21) If diminishing marginal returns have already set in for Golden Lark Woodworks, and the
marginal product of the 6th carpenter is 8 chairs, then the marginal product of the 7th carpenter
is
A) negative.
B) less than 8 chairs.
C) more than 8 chairs.
D) zero.


22) Refer to Figure 10-1. The marginal product of the 3rd worker is
A) 57.
B) 19.
C) 15.
D) 11.


23) Refer to Figure 10-1. The marginal product of the 7th worker is
A) 66.
B) 9.43.
C) 2.
D) -2.





24) Refer to Figure 10-1. The average product of the first four workers
A) is 68.
B) is 17.
C) is 11.
D) cannot be determined.


25) Refer to Figure 10-1. Diminishing marginal productivity sets in after
A) the 2nd worker is hired.
B) the 3rd worker is hired.
C) the 4th worker is hired.
D) the 5th worker is hired.


26) Refer to Figure 10-1. In a diagram that shows the marginal product of labor on the vertical axis
and labor on the horizontal axis, the marginal product curve
A) never intersects the horizontal axis.
B) intersects the horizontal axis at a point corresponding to the 5th worker.
C) intersects the horizontal axis at a point corresponding to the 6th worker.
D) intersects the horizontal axis at a point corresponding to the 8th worker.

27) If 11 workers can produce a total of 54 units of a product and a 12th worker has a marginal
product of 6 units, then the average product of 12 workers is
A) 60 units.
B) 54 units.
C) 48 units.
D) 5 units.

28) If another worker adds 9 units of output to a group of workers who had an average product of 7
units, then the average product of labor
A) will remain the same.
B) will increase.
C) will decrease.
D) and what will happen to it cannot be determined.


Table 10-1 shows the technology of production at the Matsukos Mushroom Farm for the month of May
2007.

29) Refer to Table 10-1. What is the marginal product of the 4th worker?
A) 137 pounds
B) 50 pounds
C) 12.5 pounds
D) 5 pounds

30) Refer to Table 10-1. What is the average product of labor when the farm hires 5 workers?
A) 4 pounds
B) 10.8 bushels
C) 38.2 pounds
D) 54 pounds

31) Refer to Table 10-1. Diminishing marginal returns sets in when the ________ worker is hired.
A) 2nd
B) 3rd
C) 4th
D) None of the above; the production function displays increasing marginal returns.

32) Marginal cost is equal to the
A) change in total cost divided by the change in output.
B) change in average total costs divided by the change in output.
C) change in total product divided by the change in output.
D) change in average product divided by the change in output.

33) In the short run, if marginal product is at its maximum, then
A) average cost is at its minimum.
B) average variable cost is at its minimum.
C) marginal cost is at its minimum.
D) total cost is at its maximum.

34) If the 15th unit of output has a marginal cost of $29.50 and the average cost of producing 14
units of output is $30.23, what will happen to the average cost of production if the 15th unit is
produced?
A) Average cost increases as more is produced.
B) Average cost will fall.
C) Average cost could increase or decrease depending on what happens to variable cost.
D) Average cost could increase or decrease depending on what happens to fixed cost.

35) Which of the following costs will not change as output changes?
A) marginal cost
B) total variable cost
C) average variable cost
D) average fixed cost
E) total fixed cost

36) Average fixed costs of production
A) remain constant.
B) will rise at a fixed rate as more is produced.
C) graph as a U-shaped curve.
D) fall as long as output is increased.

37) If fixed costs do not change, then marginal cost
A) also remains constant.
B) equals the change in variable cost divided by the change in output.
C) equals the change in average variable cost divided by the change in output.
D) equals the change in average fixed cost divided by the change in output.

38) Which of the following equations is correct?
A) AVC - ATC = AFC
B) AVC + ATC = AFC
C) AFC + AVC = ATC
D) ATC + AVC = AFC

39) When the average total cost is $16 and the total cost is $800, then the number of units the firm is
producing is
A) impossible to determined with the information given.
B) 12,800.
C) 784.
D) 50.

40) The formula for total fixed cost is
A) TFC = TC + TVC.
B) TFC = TVC - TC.
C) TFC = TC/TVC.
D) TFC = TC - TVC.






41) If the total cost of producing 20 units of output is $1,000 and the average variable cost is $35,
what is the firms average fixed cost at that level of output?
A) $65
B) $50
C) $15
D) It is impossible to determine without additional information.

42) If a firm produces 20 units of output and incurs a total cost of $1,000 and a variable cost is $700,
calculate the firms average fixed cost of production if it expands output to 25 units.
A) $300
B) $15
C) $12
D) It is impossible to determine without additional information.

43) If average total cost is $50 and average fixed cost is $15 when output is 20 units, then the firms
total variable cost at that level of output is
A) $1,000.
B) $700.
C) $300.
D) impossible to determine without additional information.


Table 10-2 shows cost data for Lotus Lanterns, a producer of whimsical night lights.

44) Refer to Table 10-2. What is the variable cost of production when the firm produces 115
lanterns?
A) $1,556
B) $1,157
C) $956
D) $10.05






45) Refer to Table 10-2. What is the average total cost of production when the firm produces 120
lanterns?
A) $1,680
B) $72
C) $14
D) $12.3

46) Refer to Table 10-2. What is the average variable cost per unit of production when the firm
produces 90 lanterns?
A) $490
B) $33.67
C) $7.67
D) $5.44

47) Refer to Table 10-2. What is the marginal cost per unit of production when the firm produces
100 lanterns?
A) $420
B) $32
C) $11.1
D) $8.1





48) Refer to Figure 10-4. Identify the curves in the diagram.
A) E = average fixed cost curve; F = variable cost curve; G = total cost curve,
H = marginal cost curve
B) E = marginal cost curve; F = total cost curve; G = variable cost curve, H = average fixed
cost curve
C) E = average fixed cost curve; F = average total cost curve; G = average variable cost curve,
H = marginal cost curve
D) E = marginal cost curve; F = average total cost curve; G = average variable cost curve; H =
average fixed cost curve.

49) Refer to Figure 10-4. The vertical difference between curves F and G measures
A) average fixed costs.
B) marginal costs.
C) fixed costs.
D) sunk costs.

50) Refer to Figure 10-4. Curve G approaches curve F because
A) marginal cost is above average variable costs.
B) average fixed cost falls as output rises.
C) fixed cost falls as capacity rises.
D) total cost falls as more and more is produced.

51) Long-run cost curves are U-shaped because
A) of the law of demand.
B) of the law of diminishing returns.
C) of economies and diseconomies of scale.
D) of the law of supply.

52) If, when a firm doubles all its inputs, its average cost of production decreases, then production
displays
A) diminishing returns.
B) economies of scale.
C) diseconomies of scale.
D) declining fixed costs.

53) The long-run average cost curve shows
A) the lowest average cost of producing every level of output in the long run.
B) where the most profitable level of output occurs.
C) the average cost of producing where diminishing returns are not present.
D) the plant size or scale that the firm should build.

54) If a firm decreases its plant size and finds that its long-run average costs have decreased, then
A) its labor is more productive in a smaller plant.
B) its diseconomies of scale are less.
C) the firm should reduce its plant size even more.
D) the firm is now profitable.





55) If, when a firm doubles all its inputs, its average cost of production increases, then production
displays
A) diminishing returns.
B) economies of scale.
C) diseconomies of scale.
D) declining fixed costs.

56) Which of the following is a reason why a firm would experience diseconomies of scale?
A) To finance an increase in the size of its plant a firm must borrow more money or sell more
shares of stock.
B) As the size of the firm increases, it becomes more difficult to find markets where it doesnt
already have operations.
C) As the size of the firm increases it becomes more difficult to coordinate the operations of
its manufacturing plants.
D) As the size of the firm increases, it must operate in other countries where differences in
language, customs and laws increase its average costs.

57) The minimum efficient scale is
A) the level of output where diminishing returns have not set in yet.
B) the plant size that yields the most profit.
C) level of operation where long-run average costs are lowest.
D) the smallest output level where the firm finally reaches productive efficiency.

58) At the minimum efficient scale,
A) all possible economies of scale have not been exhausted.
B) the firm has achieved the lowest possible average cost of production.
C) any increases in the scale of operation will encounter further economies of scale.
D) marginal cost is at its minimum.

59) When a firms long-run average cost curve is horizontal for a range of output, then that range of
production displays
A) increasing returns to scale.
B) constant returns to scale.
C) decreasing returns to scale.
D) constant average fixed costs.

60) What is the difference between diminishing marginal returns and diseconomies of scale?
A) Both concepts explain why marginal cost increases after some point but diminishing
marginal returns applies only in the short run when there is at least one fixed factor, while
diseconomies of scale applies in the long run when all factors are variable.
B) Both concepts explain why average total cost increases after some point but diminishing
marginal returns applies only in the short run when there is at least one fixed factor, while
diseconomies of scale applies in the long run when all factors are variable.
C) Diminishing marginal returns, which applies only in the short run when at least one factor
is fixed, explains why marginal cost increases, while diseconomies of scale, which applies
in the long run when all factors are variable, explains why average cost increases.
D) Diminishing marginal returns ,which applies only in the long run when all factors are
variable, explains why average variable cost increases, while diseconomies of scale, which
applies in the short run when at least one factor is fixed, explains why average total cost
increases.

Answers:

1 A 21 8 41 C
2 u 22 C 42 C
3 A 23 u 43 8
4 8 24 8 44 8
3 C 23 A 43 C
6 u 26 8 46 u
7 C 27 u 47 8
8 8 28 8 48 u
9 u 29 u 49 A
10 8 30 8 30 8
11 A 31 8 31 C
12 8 32 A 32 8
13 C 33 C 33 A
14 u 34 8 34 8
13 u 33 L 33 C
16 8 36 u 36 C
17 A 37 8 37 C
18 A 38 C 38 8
19 8 39 u 39 8
20 A 40 u 60 C