Chapter 13
The Costs of Production
TRUE/FALSE1.
The economic field of industrial organization examines how firms’ decisions about prices and quantities depend on the market conditions they face.ANS: T DIF: 2 REF: 13-0 NAT: Analytic LOC: Costs of production TOP: Industrial organization MSC: Interpretive
2. Profit equals marginal revenue minus marginal cost.ANS: F DIF: 1 REF: 13-1 LOC: Costs of production TOP: Profit
NAT: Analytic
MSC: DefinitionalNAT: Analytic MSC: Definitional
3. Profit equals total revenue minus total cost.ANS: T DIF: 1 REF: 13-1 LOC: Costs of production TOP: Profit
4.
The difference between economic profit and accounting profit is that economic profit is calculated based on
both implicit and explicit costs whereas accounting profit is calculated based on explicit costs only.ANS: T DIF: 2 REF: 13-1 NAT: Analytic LOC: Costs of production TOP: Economic profit | Accounting profit MSC: Interpretive
5. Accounting profit is greater than or equal to economic profit.ANS: T DIF: 2 REF: 13-1 NAT: Analytic LOC: Costs of production TOP: Accounting profit | Economic profit MSC: Analytical
6. Economic profit is greater than or equal to accounting profit.ANS: F DIF: 2 REF: 13-1 NAT: Analytic LOC: Costs of production TOP: Accounting profit | Economic profit MSC: Analytical
7. Although economists and accountants treat many costs differently, they both treat the cost of capital the same.ANS: F DIF: 2 REF: 13-1 NAT: Analytic LOC: Costs of production TOP: Economic profit | Accounting profit MSC: Interpretive
8. Accountants keep track of the money that flows into and out of firms.ANS: T DIF: 1 REF: 13-1 NAT: Analytic LOC: Costs of production TOP: Accounting profit MSC: Interpretive
9. When economists speak of a firm's costs, they are usually excluding the opportunity costs.ANS: F DIF: 2 REF: 13-1 NAT: Analytic LOC: Costs of production TOP: Opportunity costs MSC: Interpretive
10. Economists and accountants both include forgone income as a cost to a small business owner.ANS: F DIF: 2 REF: 13-1 NAT: Analytic LOC: Costs of production TOP: Opportunity costs MSC: Interpretive
11. Economists and accountants usually disagree on the inclusion of implicit costs into the cost analysis of a firm.ANS: T DIF: 1 REF: 13-1 NAT: Analytic LOC: Costs of production TOP: Implicit costs MSC: Interpretive
850
Chapter 13/The Costs of Production ? 851
12. Implicit costs are costs that do not require an outlay of money by the firm.
ANS: T DIF: 1 REF: 13-1 NAT: Analytic LOC: Costs of production TOP: Implicit costs MSC: Definitional
13. Accountants often ignore implicit costs.ANS: T DIF: 1 LOC: Costs of production MSC: Interpretive
REF: 13-1 NAT: Analytic TOP: Implicit costs
14. In the long run, a factory is usually considered a fixed input.
ANS: F DIF: 2 REF: 13-2 LOC: Costs of production TOP: Long run
NAT: Analytic
MSC: Interpretive
15. Diminishing marginal productivity implies decreasing total product.ANS: F DIF: 2 REF: 13-2 NAT: Analytic LOC: Costs of production TOP: Diminishing marginal product MSC: Interpretive
16. Diminishing marginal product exists when the total cost curve becomes flatter as outputs increases.ANS: F DIF: 2 REF: 13-2 NAT: Analytic LOC: Costs of production TOP: Diminishing marginal product MSC: Interpretive
17. Diminishing marginal product exists when the production function becomes flatter as inputs increase.ANS: T DIF: 2 REF: 13-2 NAT: Analytic LOC: Costs of production TOP: Diminishing marginal product MSC: Interpretive
18. A second or third worker may have a higher marginal product than the first worker in certain circumstances.ANS: T DIF: 2 REF: 13-2 NAT: Analytic LOC: Costs of production TOP: Marginal product MSC: Interpretive
19. The typical total-cost curve is U-shaped.ANS: F DIF: 2 LOC: Costs of production MSC: Interpretive
REF: 13-2 NAT: Analytic TOP: Total-cost curve
20. The average fixed cost curve is constant.ANS: F DIF: 2 REF: 13-2 NAT: Analytic LOC: Costs of production TOP: Average fixed cost MSC: Interpretive
21. In the short run, if a firm produces nothing, total costs are zero.ANS: F DIF: 2 REF: 13-2 NAT: Analytic LOC: Costs of production TOP: Total costs | Fixed costs MSC: Interpretive
22. If a firm produces nothing, it still incurs its fixed costs.ANS: T DIF: 2 REF: 13-2 LOC: Costs of production TOP: Fixed costs
NAT: Analytic
MSC: Interpretive
23. The shape of the total cost curve is unrelated to the shape of the production function.ANS: F DIF: 2 REF: 13-2 NAT: Analytic LOC: Costs of production TOP: Total-cost curve | Production function MSC: Interpretive
852 ? Chapter 13/The Costs of Production
24. The shape of the total cost curve is related to the shape of the production function.ANS: T DIF: 2 REF: 13-2 NAT: Analytic LOC: Costs of production TOP: Total-cost curve | Production function MSC: Interpretive
25. If the marginal cost of producing the tenth unit of output is $3, and if the average total cost of producing the
tenth unit of output is $2, then at ten units of output, average total cost is rising.ANS: T DIF: 3 REF: 13-3 NAT: Analytic LOC: Costs of production TOP: Marginal cost | Average total cost MSC: Analytical
26. If the marginal cost of producing the tenth unit of output is $2.50, and if the average total cost of producing the
tenth unit of output is $3, then at ten units of output, average total cost is rising.ANS: F DIF: 3 REF: 13-3 NAT: Analytic LOC: Costs of production TOP: Marginal cost | Average total cost MSC: Analytical
27. If the marginal cost of producing the fifth unit of output is higher than the marginal cost of producing the
fourth unit of output, then at five units of output, average total cost must be rising.ANS: F DIF: 3 REF: 13-3 NAT: Analytic LOC: Costs of production TOP: Marginal cost | Average total cost MSC: Analytical
28. Marginal costs are costs that do not vary with the quantity of output produced.ANS: F DIF: 1 REF: 13-3 NAT: Analytic LOC: Costs of production TOP: Marginal cost MSC: Definitional
29. Several related measures of cost can be derived from a firm's total cost.ANS: T DIF: 2 REF: 13-3 NAT: Analytic LOC: Costs of production TOP: Cost curves MSC: Interpretive
30. Variable costs usually change as the firm alters the quantity of output produced.ANS: T DIF: 2 REF: 13-3 NAT: Analytic LOC: Costs of production TOP: Variable costs MSC: Definitional
31. Variable costs equal fixed costs when nothing is produced.ANS: F DIF: 2 REF: 13-3 NAT: Analytic LOC: Costs of production TOP: Variable costs MSC: Interpretive
32. The cost of producing an additional unit of a good is not the same as the average cost of the good.ANS: T DIF: 2 REF: 13-3 NAT: Analytic LOC: Costs of production TOP: Average total cost MSC: Interpretive
33. Average variable cost is equal to total variable cost divided by quantity of output.ANS: T DIF: 2 REF: 13-3 NAT: Analytic LOC: Costs of production TOP: Average variable cost MSC: Definitional
34. The average total cost curve is unaffected by diminishing marginal product.ANS: F DIF: 3 REF: 13-3 NAT: Analytic LOC: Costs of production TOP: Diminishing marginal product | Average total cost MSC: Interpretive
35. The average total cost curve reflects the shape of both the average fixed cost and average variable cost curves.ANS: T DIF: 2 REF: 13-3 NAT: Analytic LOC: Costs of production TOP: Average total cost MSC: Interpretive
Chapter 13/The Costs of Production ? 853
36. If the marginal cost curve is rising, then so is the average total cost curve.
ANS: F DIF: 2 REF: 13-3 NAT: Analytic LOC: Costs of production TOP: Marginal cost | Average total cost MSC: Interpretive
37. The marginal cost curve intersects the average total cost curve at the minimum point of the average total cost
curve.ANS: T DIF: 2 REF: 13-3 NAT: Analytic LOC: Costs of production TOP: Average total cost | Marginal cost MSC: Interpretive
38. The marginal cost curve intersects the average total cost curve at the minimum point of the marginal cost
curve.ANS: F DIF: 2 REF: 13-3 NAT: Analytic LOC: Costs of production TOP: Average total cost | Marginal cost MSC: Interpretive
39. Assume Jack received all A's in his classes last semester. If Jack gets all B's in his classes this semester, his
GPA may or may not fall.ANS: T DIF: 3 REF: 13-3 NAT: Analytic LOC: Costs of production TOP: Average total cost MSC: Interpretive
40. Average total cost and marginal cost express information that is already contained in a firm's total cost.ANS: T DIF: 2 REF: 13-3 NAT: Analytic LOC: Costs of production TOP: Average total cost MSC: Interpretive
41. Average total cost reveals how much total cost will change as the firm alters its level of production.ANS: F DIF: 2 REF: 13-3 NAT: Analytic LOC: Costs of production TOP: Average total cost MSC: Interpretive
42. The shape of the marginal cost curve tells a producer something about the marginal product of her workers.ANS: T DIF: 2 REF: 13-3 NAT: Analytic LOC: Costs of production TOP: Marginal cost | Marginal product MSC: Interpretive
43. When average total cost rises if a producer either increases or decreases production, then the firm is said to be
operating at efficient scale.ANS: T DIF: 2 REF: 13-3 NAT: Analytic LOC: Costs of production TOP: Efficient scale MSC: Interpretive
44. Fixed costs are those costs that remain fixed no matter how long the time horizon is.ANS: F DIF: 2 REF: 13-4 NAT: Analytic LOC: Costs of production TOP: Fixed costs MSC: Interpretive
45. Diseconomies of scale often arise because higher production levels allow specialization among workers.ANS: F DIF: 2 REF: 13-4 NAT: Analytic LOC: Costs of production TOP: Diseconomies of scale MSC: Interpretive
46. Economies of scale often arise because higher production levels allow specialization among workers.ANS: T DIF: 2 REF: 13-4 NAT: Analytic LOC: Costs of production TOP: Economies of scale MSC: Interpretive
854 ? Chapter 13/The Costs of Production
47. If long-run average total cost is rising, then the firm is experiencing economies of scale.ANS: F DIF: 2 REF: 13-4 NAT: Analytic LOC: Costs of production TOP: Economies of scale | Diseconomies of scale MSC: Definitional
48. The fact that many inputs are fixed in the short run but variable in the long run has little impact on the firm's
cost curves.ANS: F DIF: 2 REF: 13-4 NAT: Analytic LOC: Costs of production TOP: Long run MSC: Interpretive
49. In some cases, specialization allows larger factories to produce goods at a lower average cost than smaller
factories.ANS: T DIF: 2 REF: 13-4 NAT: Analytic LOC: Costs of production TOP: Specialization MSC: Interpretive
50. The use of specialization to achieve economies of scale is one reason modern societies are as prosperous as
they are.ANS: T DIF: 2 REF: 13-4 NAT: Analytic LOC: Costs of production TOP: Specialization MSC: Interpretive
51. As a firm moves along its long-run average cost curve, it is adjusting the size of its factory to the quantity of
production.ANS: T DIF: 2 REF: 13-4 NAT: Analytic LOC: Costs of production TOP: Average total cost MSC: Interpretive
52. Because of the greater flexibility that firms have in the long run, all short-run cost curves lie on or above the
long-run curve.ANS: T DIF: 2 REF: 13-4 NAT: Analytic LOC: Costs of production TOP: Average total cost MSC: Interpretive
53. There is general agreement among economists that the long-run time period exceeds one year.ANS: F DIF: 2 REF: 13-4 NAT: Analytic LOC: Costs of production TOP: Long run MSC: Interpretive
Table 13-1
Listed in the table are the long-run total costs for three different firms.
Quantity Firm A Firm B Firm C 1 100 100 100 2 100 200 300 3 100 300 600 4 100 400 1,000 5 100 500 1,500 54. Refer to Table 13-1. Firm A is experiencing economies of scale.ANS: T DIF: 3 REF: 13-4 NAT: Analytic LOC: Costs of production TOP: Economies of scale MSC: Analytical
55. Adam Smith's example of the pin factory demonstrates that economies of scale result from specialization.ANS: T DIF: 2 REF: 13-4 NAT: Analytic LOC: Costs of production TOP: Economies of scale MSC: Interpretive