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Exam 12: The Costs of Production

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Question 261

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Which of the following statements is correct?

A) For most producers,the average total cost curve never crosses the marginal cost curve.
B) The average fixed cost curve must eventually rise.
C) The average total cost curve first rises,then falls with increased output.
D) The marginal cost curve eventually rises with the quantity of output.

E) A) and D)
F) A) and C)

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Question 262

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A firm's opportunity costs of production are equal to its

A) explicit costs only.
B) implicit costs only.
C) explicit costs + implicit costs.
D) explicit costs + implicit costs + total revenue.

E) C) and D)
F) B) and D)

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Question 263

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How would a production function that exhibits decreasing marginal product affect the shape of the total cost curve? Explain or draw a graph.

Bob Edwards owns a bagel shop.Bob hires an economist who assesses the shape of the bagel shop's average total cost (ATC)curve as a function of the number of bagels produced.The results indicate a U-shaped average total cost curve.Bob's economist explains that ATC is U-shaped for two reasons.The first is the existence of diminishing marginal product,which causes it to rise.What would be the second reason? Assume that the marginal cost curve is linear.(Hint: The second reason relates to average fixed cost)

According to the mathematical laws that govern the relationship between average total cost and marginal cost,where must these two curves intersect?

Figure 12-2 -Refer to Figure 12-2.The graph illustrates a typical production function.Based on its shape,what does the corresponding total cost curve look like?

In the long run Irene's Ice Cream Parlor incurs total costs of $2,500 when output is 1,250 units and $4,000 when output is 1,500 units.For this range of output,Irine's exhibits

Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired.In addition,suppose that the average total cost when 5 units of output are produced is $30,and the marginal cost of the sixth unit of output is $60.What is the average total cost when six units are produced?

Scenario 12-5 Suppose that Emily opens a restaurant.She receives a loan from a bank for $200,000.She withdraws $100,000 from her personal savings account.The interest rate on the loan is 6%,and the interest rate on her savings account is 2%. -Refer to Scenario 12-5.Emily's total opportunity cost of capital is

Table 12-6 Wooden Chair Factory -Refer to Table 12-6.Each worker at the Wooden Chair Factory costs $12 per hour.The cost of each machine is $20 per day regardless of the number of chairs produced.If the factory produces at a rate of 70 chairs per hour and operates 8 hours per day,what is the factory's total labor cost per day?

Table 12-15 Consider the following table of long-run total cost for four different firms: -Refer to Table 12-13.Which firm has economies of scale and then diseconomies of scale as output increases from 1 to 7?

Pete owns a shoe-shine business.His accountant most likely includes which of the following costs on his financial statements? (i) shoe polish (ii) rent on the shoe stand (iii) wages Pete could earn delivering newspapers (iv) Interest that Pete's money was earning before he spent his savings to set up the shoe-shine business

Figure 12-9 The figure below depicts average total cost functions for a firm that produces automobiles. -Refer to Figure 12-9.The firm experiences economies of scale at which output levels?

The marginal-cost curve intersects the average-total-cost curve at the minimum point of the average-total-cost curve.

Scenario 12-4 Suppose that Abdul opens a coffee shop.He receives a loan from a bank for $100,000.He withdraws $50,000 from his personal savings account.The interest rate on the loan is 8%,and the interest rate on his savings account is 2%. -Refer to Scenario 12-4.Abdul's implicit cost of capital is

Scenario 12-3 Gary is a senior majoring in computer network development at Smart State University.While he has been attending college,Gary started a computer consulting business to help senior citizens set up their network connections and teach them how to use e-mail.Gary charges $25 per hour for his consulting services.Gary also works 5 hours a week for the Economics Department to maintain that department's Web page.The Economics Department pays Gary $20 per hour. -Refer to Scenario 12-3.If Gary can work additional hours at either job,what is the opportunity cost if Gary spends one hour reading a novel?

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.

In his book,An Inquiry into the Nature and Causes of the Wealth of Nations,Adam Smith credits economies of scale to

Table 12-7 The Flying Elvis Copter Rides -Refer to Table 12-7.What is the value of Q?

Figure 12-3 -Refer to Figure 12-3.The graph illustrates a typical total cost curve.Based on its shape,what does the corresponding production function look like?