econ 910 chapter 9

1. 'Economies of scale' refers to:
A. the notion that small firms are less bureaucratic and, therefore, more efficient than corporations.
B. public investments in highways, schools, utilities etc.
C. the fact that large producers may be able to use more efficient technologies.
D. the reallocation of labour from less productive to more productive uses.

C

2. Economic cost can best be defined as:
A. any contractual obligation which results in a flow of money expenditures from an enterprise to resource suppliers.
B. any contractual obligation to labour, or material suppliers.
C. compensations which must be received by resource owners to ensure their continued supply.
D. all costs, exclusive of payments to fixed factors of production.

C

3. Which of the following constitutes an implicit cost to the Jackson Manufacturing Company?
A. Payments of wages to its office workers.
B. Property taxes.
C. Rent paid for the use of equipment owned by the Schultz Machinery Company.
D. Depreciation charges on company-owned equipment.

D

4. Suppose that a business incurred implicit costs of $200 000 and explicit costs of $1 million in a specific
year. If the firm sold 4000 units of its output at $300 per unit, its accounting profits were:
A. $100 000, and its economic profits were zero.
B. $200 000, and its economic profits were zero.
C. $100 000, and its economic profits were $100 000.
D. zero, and its economic loss was $200 000.

B

5. Economic profits are calculated by subtracting:
A. explicit costs from total revenue.
B. implicit costs from total revenue.
C. implicit costs from normal profits.
D. explicit and implicit costs from total revenue.

D

6. Normal profit is:
A. determined by subtracting implicit costs from total revenue.
B. determined by subtracting explicit costs from total revenue.
C. the return to the entrepreneur when economic profits are zero.
D. the average profitability of an industry over the preceding 10 years.

C

7. Which of the following definitions is correct?
A. Accounting profit + economic profit = normal profit.
B. Economic profit - accounting profit = explicit costs.
C. Economic profit = accounting profit - implicit costs.
D. Economic profit - implicit costs = accounting profits.

C

8. The basic characteristic of the short run is that:
A. 'barriers to entry' prevent new firms from entering the industry.
B. the firm does not have sufficient time to change the size of its plant.
C. the firm does not have sufficient time to cut its rate of output to zero.
D. the firm does not have sufficient time to change the amounts of any of the resources it employs.

B

9. To economists, the main difference between 'the short run' and 'the long run' is that:
A. the law of diminishing returns applies in the long run, but not in the short run.
B. in the long run, all resources are variable while, in the short run, at least one resource is fixed.
C. fixed costs are more important to decision making in the long run than they are in the short run.
D. in the short run all resources are fixed, while in the long run, all resources are variable.

B

10. The law of diminishing returns indicates that:
A.as extra units of a variable resource are added to a fixed resource, the extra or marginal product will
decline beyond some point.
B. because of economies and diseconomies of scale, a competitive firm's long-run average cost curve will be U-shaped.
C. the demand for goods produced by purely competitive industries is down sloping.
D. beyond some point, the extra utility derived from additional units of a product will yield for the consumer smaller and smaller extra amounts of satisfaction.

A

11. Which of the following statements concerning the relationships between total product (TP), average
product (AP) and marginal product (MP) is not correct?
A. AP continues to rise so long as TP is rising.
B. AP reaches a maximum before TP reaches a maximum.
C. TP reaches a maximum when the MP of the variable input becomes zero.
D. MP cuts AP at the maximum AP.

A

12. The following is output data for a firm. Assume that the amounts of all non-labour resources are fixed.
Number of workers Units of output
0 0
1 40
2 90
3 126
4 150
5 165
6 180
Refer to the above information. Diminishing returns become evident with the addition of:
A. the fourth worker.
B. the third worker.
C. the second worker.
D. the first worker.

B

13. The following is the total and marginal product for a firm.
Number of workers Total product Marginal product
0 0 —
1 8 8
2 10
3 25
4 30
5 3
6 34
Refer to the above information. When two workers are employed:
A. total product is 20.
B. total product is 18.
C. average product is 10.
D. total product cannot be determined from the information given.

B

14. Which of the following is most likely to be a fixed cost?
A. Shipping charges.
B. Property insurance premiums.
C. Wages for unskilled labour.
D. Expenditures for raw materials.

B

15. The cost of any output is minimised when:
A. the marginal product per dollar's worth of each resource used is the same.
B. the marginal product of each resource used is the same.
C. the price of each resource used is the same.
D. none of the above.

A

16. Which of the following is most likely to be a variable cost?
A. Fuel and power payments.
B. Interest on bonded indebtedness.
C. Rental payments on IBM equipment.
D. Real estate taxes.

A

17. Marginal cost may be defined as the:
A. rate of change in total fixed cost which results from producing one more unit of output.
B. change in total cost which results from producing one more unit of output.
C. change in average variable cost which results from producing one more unit of output.
D. change in average total cost which results from producing one more unit of output.

B

18. Average fixed cost:
A. is intersected by marginal cost at its minimum point.
B. may be found for any output by adding average variable cost and average total cost.
C. graphs as a U-shaped curve.
D. declines so long as output increases.

D

19. The vertical distance between ATC and AVC reflects:
A. the average fixed cost at each level of output.
B. marginal cost at each level of output.
C. the presence of economies of scale.
D. implicit costs.

A

20. Assume that in the short run, a firm which is producing 100 units of output has average total costs of $200
and average variable costs of $150. The firm's total fixed costs are:
A. $5000.
B. $500.
C. $0.50.
D. $50.

A

21. The following is the total output and cost data for a firm.
Total Output Total Cost($)
0 24
1 33
3 41
3 48
4 54
5 61
6 69
Refer to the above cost data. The average total cost of producing 3 units of output:
A. is $14.00.
B. is $16.00.
C. is $13.50.
D. cannot be determined from the information given.

B

22. The following is the total output and cost data for a firm.
Total Output Total Cost($)
0 24
1 33
3 41
3 48
4 54
5 61
6 69
Refer to the above cost data. The marginal cost of producing the sixth unit of output:
A. is $24.
B. is $16.
C. is $8.
D. cannot be determined from the information given.

C

23. If a technological advance reduces the amount of variable resources needed to produce any given level of
output, this will cause:
A. the AVC curve to shift downward.
B. the MC curve to shift downward.
C. the ATC curve to shift downward.
D. all of the above.

D

24. The Sunshine Corporation finds that its costs are $40 when it produces no output. Its total variable costs
(TVC) change with output as shown in the table below.
Output TVC($)
1 30
2 50
3 65
4 85
5 110
Refer to the above information. This firm:
A. is making an economic profit of $260.
B. is realising a loss of $125.
C. may be either realising a profit or a loss.
D. is selling its output in a competitive market.

C

25. Economies and diseconomies of scale explain:
A. the profit-maximising level of production.
B. why the firm's long-run average cost curve is U-shaped.
C.why the firm's short-run marginal cost curve cuts the short-run average variable cost curve at its
minimum point.
D. the distinction between fixed and variable costs.

B

26. In the long run:
A. all costs are variable costs.
B. all costs are fixed costs.
C. variable costs equal fixed costs.
D. fixed costs are greater than variable costs.

A

27. The long-run average cost curve:
A. will rise if diminishing returns are encountered.
B. will fall if diminishing returns are encountered.
C. will rise if economies of scale are incurred.
D. is based on the assumption that all resources are variable.

D

28. If a firm doubles its output in the long run and its unit costs of production decline, we can conclude that:
A. technological progress has occurred.
B. economies of scale are being realised.
C. the firm is encountering diminishing returns.
D. diseconomies of scale are being encountered.

B

29. The minimum efficient scale of a firm:
A. is realised somewhere in the range of diseconomies of scale.
B. occurs where marginal product becomes zero.
C. is in the middle of the range of constant returns to scale.
D. is the smallest level of output at which long-run average cost is minimised.

D

30. If an industry's long-run average cost curve has an extended range of constant returns to scale, this implies
that:
A. technology precludes both economies and diseconomies of scale.
B. the industry will be a natural monopoly.
C. both relatively small and relatively large firms can be viable in the industry.
D. the industry will be comprised of a very large number of small firms.

C

31. If a firm increases all of its inputs by 10% and its output increases by 15%, we can say that:
A. it is encountering diseconomies of scale.
B. it is encountering economies of scale.
C. the law of diminishing returns is taking hold.
D. the firm's long-run ATC curve will be rising.

B

32. As successive units of labour are applied to a set of fixed resources, the marginal product of labour:
A. diminishes at all levels of production.
B. may initially increase, then diminish, but will never become negative.
C. may initially increase, then diminish, and ultimately become negative.
D. is always less than average product.

C

33. The short run is a period of time during which all costs are fixed costs.
A. True
B. False

...

34. The law of diminishing returns accounts for the fact that the long-run average cost curve is U-shaped.
A. True
B. False

...

35. Diseconomies of scale stem, primarily, from the difficulties in managing and coordinating a large-scale
business enterprise.
A. True
B. False

...

36. At zero units of output, a firm's variable costs are zero.
A. True
B. False

...

37. Average fixed costs diminish so long as output increases.
A. True
B. False

...

38. If marginal cost lies below average variable cost, average variable cost must be falling.
A. True
B. False

...

39. When economic profits equal zero, normal profits are negative or equal zero.
A. True
B. False

...

40. In the long run, all resource inputs are fixed instead of variable.
A. True
B. False

...

41. The law of diminishing marginal utility explains why short-run production costs increase directly with a
firm's level of output.
A. True
B. False

...

42. The short-run marginal-cost curve is upward sloping because of the law of diminishing marginal returns.
A. True
B. False

...

43. Economies of scale are generally in evidence over an entire range of output.
A. True
B. False

...

44. Economies of scale are generally in evidence over low to medium levels of output.
A. True
B. False

...

45. If economies of scale are quickly exhausted, and diseconomies of scale set in at a low level of output
relative to the market, the industry will have a small number of large firms.
A. True
B. False

...

46. Explicit costs are resources for which the firm does not pay, but which have an opportunity cost, while
implicit costs are resource for which direct monetary payment is made.
A. True
B. False

...

47. An example of an explicit cost of production would be:
A. the cost of forgone labour earnings for an entrepreneur.
B. the lost opportunity to invest in other capital markets when the money is invested in one's business.
C. the cost of flour for a baker.
D. None of the above is correct.

...

48. An example of an implicit cost of production would be:
A.the income an entrepreneur could have earned working for someone else.
B. the cost of raw materials for producing bread in a bakery.
C. the cost of a delivery truck in a business that rarely makes deliveries.
D. All of the above are correct.

...

49. Which of these assumptions is often realistic for a firm in the short run?
A. The firm can vary both the size of its factory and the number of workers it employs.
B. The firm can vary the size of its factory, but not the number of workers it employs.
C.The firm can vary the number of workers it employs, but not the size of its factory.
D. The firm can vary neither the size of its factory nor the number of workers it employs.

...

50. The marginal product of an input in the production process is the increase in:
A. total revenue obtained from an additional unit of that input.
B. profit obtained from an additional unit of that input.
C. total revenue obtained from an additional unit of that input.
D. quantity of output obtained from an additional unit of that input.

...

51. Fixed costs can be defined as costs that:
A. vary inversely with production.
B. vary in proportion with production.
C. are incurred only when production is large enough.
D. are incurred even if nothing is produced.

...

52. When marginal cost is less than average total cost:
A. marginal cost must be falling.
B. average variable cost must be falling.
C. average total cost is falling.
D. average total cost is rising.

...

53. Marginal cost is equal to average total cost when:
A. average variable cost is falling.
B. average fixed cost is rising.
C. marginal cost is at its minimum.
D. average total cost is at its minimum.

...

54. If marginal product is rising:
A. marginal cost will be falling.
B. marginal cost will be increasing.
C. marginal cost will be constant.
D. There is no relationship between marginal product and marginal cost.

...

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econ 910 chapter 9

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1. ‘Economies of scale’ refers to:
A. the notion that small firms are less bureaucratic and, therefore, more efficient than corporations.
B. public investments in highways, schools, utilities etc.
C. the fact that large producers may be able to use more efficient technologies.
D. the reallocation of labour from less productive to more productive uses.

C

2. Economic cost can best be defined as:
A. any contractual obligation which results in a flow of money expenditures from an enterprise to resource suppliers.
B. any contractual obligation to labour, or material suppliers.
C. compensations which must be received by resource owners to ensure their continued supply.
D. all costs, exclusive of payments to fixed factors of production.

C

3. Which of the following constitutes an implicit cost to the Jackson Manufacturing Company?
A. Payments of wages to its office workers.
B. Property taxes.
C. Rent paid for the use of equipment owned by the Schultz Machinery Company.
D. Depreciation charges on company-owned equipment.

D

4. Suppose that a business incurred implicit costs of $200 000 and explicit costs of $1 million in a specific
year. If the firm sold 4000 units of its output at $300 per unit, its accounting profits were:
A. $100 000, and its economic profits were zero.
B. $200 000, and its economic profits were zero.
C. $100 000, and its economic profits were $100 000.
D. zero, and its economic loss was $200 000.

B

5. Economic profits are calculated by subtracting:
A. explicit costs from total revenue.
B. implicit costs from total revenue.
C. implicit costs from normal profits.
D. explicit and implicit costs from total revenue.

D

6. Normal profit is:
A. determined by subtracting implicit costs from total revenue.
B. determined by subtracting explicit costs from total revenue.
C. the return to the entrepreneur when economic profits are zero.
D. the average profitability of an industry over the preceding 10 years.

C

7. Which of the following definitions is correct?
A. Accounting profit + economic profit = normal profit.
B. Economic profit – accounting profit = explicit costs.
C. Economic profit = accounting profit – implicit costs.
D. Economic profit – implicit costs = accounting profits.

C

8. The basic characteristic of the short run is that:
A. ‘barriers to entry’ prevent new firms from entering the industry.
B. the firm does not have sufficient time to change the size of its plant.
C. the firm does not have sufficient time to cut its rate of output to zero.
D. the firm does not have sufficient time to change the amounts of any of the resources it employs.

B

9. To economists, the main difference between ‘the short run’ and ‘the long run’ is that:
A. the law of diminishing returns applies in the long run, but not in the short run.
B. in the long run, all resources are variable while, in the short run, at least one resource is fixed.
C. fixed costs are more important to decision making in the long run than they are in the short run.
D. in the short run all resources are fixed, while in the long run, all resources are variable.

B

10. The law of diminishing returns indicates that:
A.as extra units of a variable resource are added to a fixed resource, the extra or marginal product will
decline beyond some point.
B. because of economies and diseconomies of scale, a competitive firm’s long-run average cost curve will be U-shaped.
C. the demand for goods produced by purely competitive industries is down sloping.
D. beyond some point, the extra utility derived from additional units of a product will yield for the consumer smaller and smaller extra amounts of satisfaction.

A

11. Which of the following statements concerning the relationships between total product (TP), average
product (AP) and marginal product (MP) is not correct?
A. AP continues to rise so long as TP is rising.
B. AP reaches a maximum before TP reaches a maximum.
C. TP reaches a maximum when the MP of the variable input becomes zero.
D. MP cuts AP at the maximum AP.

A

12. The following is output data for a firm. Assume that the amounts of all non-labour resources are fixed.
Number of workers Units of output
0 0
1 40
2 90
3 126
4 150
5 165
6 180
Refer to the above information. Diminishing returns become evident with the addition of:
A. the fourth worker.
B. the third worker.
C. the second worker.
D. the first worker.

B

13. The following is the total and marginal product for a firm.
Number of workers Total product Marginal product
0 0 —
1 8 8
2 10
3 25
4 30
5 3
6 34
Refer to the above information. When two workers are employed:
A. total product is 20.
B. total product is 18.
C. average product is 10.
D. total product cannot be determined from the information given.

B

14. Which of the following is most likely to be a fixed cost?
A. Shipping charges.
B. Property insurance premiums.
C. Wages for unskilled labour.
D. Expenditures for raw materials.

B

15. The cost of any output is minimised when:
A. the marginal product per dollar’s worth of each resource used is the same.
B. the marginal product of each resource used is the same.
C. the price of each resource used is the same.
D. none of the above.

A

16. Which of the following is most likely to be a variable cost?
A. Fuel and power payments.
B. Interest on bonded indebtedness.
C. Rental payments on IBM equipment.
D. Real estate taxes.

A

17. Marginal cost may be defined as the:
A. rate of change in total fixed cost which results from producing one more unit of output.
B. change in total cost which results from producing one more unit of output.
C. change in average variable cost which results from producing one more unit of output.
D. change in average total cost which results from producing one more unit of output.

B

18. Average fixed cost:
A. is intersected by marginal cost at its minimum point.
B. may be found for any output by adding average variable cost and average total cost.
C. graphs as a U-shaped curve.
D. declines so long as output increases.

D

19. The vertical distance between ATC and AVC reflects:
A. the average fixed cost at each level of output.
B. marginal cost at each level of output.
C. the presence of economies of scale.
D. implicit costs.

A

20. Assume that in the short run, a firm which is producing 100 units of output has average total costs of $200
and average variable costs of $150. The firm’s total fixed costs are:
A. $5000.
B. $500.
C. $0.50.
D. $50.

A

21. The following is the total output and cost data for a firm.
Total Output Total Cost($)
0 24
1 33
3 41
3 48
4 54
5 61
6 69
Refer to the above cost data. The average total cost of producing 3 units of output:
A. is $14.00.
B. is $16.00.
C. is $13.50.
D. cannot be determined from the information given.

B

22. The following is the total output and cost data for a firm.
Total Output Total Cost($)
0 24
1 33
3 41
3 48
4 54
5 61
6 69
Refer to the above cost data. The marginal cost of producing the sixth unit of output:
A. is $24.
B. is $16.
C. is $8.
D. cannot be determined from the information given.

C

23. If a technological advance reduces the amount of variable resources needed to produce any given level of
output, this will cause:
A. the AVC curve to shift downward.
B. the MC curve to shift downward.
C. the ATC curve to shift downward.
D. all of the above.

D

24. The Sunshine Corporation finds that its costs are $40 when it produces no output. Its total variable costs
(TVC) change with output as shown in the table below.
Output TVC($)
1 30
2 50
3 65
4 85
5 110
Refer to the above information. This firm:
A. is making an economic profit of $260.
B. is realising a loss of $125.
C. may be either realising a profit or a loss.
D. is selling its output in a competitive market.

C

25. Economies and diseconomies of scale explain:
A. the profit-maximising level of production.
B. why the firm’s long-run average cost curve is U-shaped.
C.why the firm’s short-run marginal cost curve cuts the short-run average variable cost curve at its
minimum point.
D. the distinction between fixed and variable costs.

B

26. In the long run:
A. all costs are variable costs.
B. all costs are fixed costs.
C. variable costs equal fixed costs.
D. fixed costs are greater than variable costs.

A

27. The long-run average cost curve:
A. will rise if diminishing returns are encountered.
B. will fall if diminishing returns are encountered.
C. will rise if economies of scale are incurred.
D. is based on the assumption that all resources are variable.

D

28. If a firm doubles its output in the long run and its unit costs of production decline, we can conclude that:
A. technological progress has occurred.
B. economies of scale are being realised.
C. the firm is encountering diminishing returns.
D. diseconomies of scale are being encountered.

B

29. The minimum efficient scale of a firm:
A. is realised somewhere in the range of diseconomies of scale.
B. occurs where marginal product becomes zero.
C. is in the middle of the range of constant returns to scale.
D. is the smallest level of output at which long-run average cost is minimised.

D

30. If an industry’s long-run average cost curve has an extended range of constant returns to scale, this implies
that:
A. technology precludes both economies and diseconomies of scale.
B. the industry will be a natural monopoly.
C. both relatively small and relatively large firms can be viable in the industry.
D. the industry will be comprised of a very large number of small firms.

C

31. If a firm increases all of its inputs by 10% and its output increases by 15%, we can say that:
A. it is encountering diseconomies of scale.
B. it is encountering economies of scale.
C. the law of diminishing returns is taking hold.
D. the firm’s long-run ATC curve will be rising.

B

32. As successive units of labour are applied to a set of fixed resources, the marginal product of labour:
A. diminishes at all levels of production.
B. may initially increase, then diminish, but will never become negative.
C. may initially increase, then diminish, and ultimately become negative.
D. is always less than average product.

C

33. The short run is a period of time during which all costs are fixed costs.
A. True
B. False

34. The law of diminishing returns accounts for the fact that the long-run average cost curve is U-shaped.
A. True
B. False

35. Diseconomies of scale stem, primarily, from the difficulties in managing and coordinating a large-scale
business enterprise.
A. True
B. False

36. At zero units of output, a firm’s variable costs are zero.
A. True
B. False

37. Average fixed costs diminish so long as output increases.
A. True
B. False

38. If marginal cost lies below average variable cost, average variable cost must be falling.
A. True
B. False

39. When economic profits equal zero, normal profits are negative or equal zero.
A. True
B. False

40. In the long run, all resource inputs are fixed instead of variable.
A. True
B. False

41. The law of diminishing marginal utility explains why short-run production costs increase directly with a
firm’s level of output.
A. True
B. False

42. The short-run marginal-cost curve is upward sloping because of the law of diminishing marginal returns.
A. True
B. False

43. Economies of scale are generally in evidence over an entire range of output.
A. True
B. False

44. Economies of scale are generally in evidence over low to medium levels of output.
A. True
B. False

45. If economies of scale are quickly exhausted, and diseconomies of scale set in at a low level of output
relative to the market, the industry will have a small number of large firms.
A. True
B. False

46. Explicit costs are resources for which the firm does not pay, but which have an opportunity cost, while
implicit costs are resource for which direct monetary payment is made.
A. True
B. False

47. An example of an explicit cost of production would be:
A. the cost of forgone labour earnings for an entrepreneur.
B. the lost opportunity to invest in other capital markets when the money is invested in one’s business.
C. the cost of flour for a baker.
D. None of the above is correct.

48. An example of an implicit cost of production would be:
A.the income an entrepreneur could have earned working for someone else.
B. the cost of raw materials for producing bread in a bakery.
C. the cost of a delivery truck in a business that rarely makes deliveries.
D. All of the above are correct.

49. Which of these assumptions is often realistic for a firm in the short run?
A. The firm can vary both the size of its factory and the number of workers it employs.
B. The firm can vary the size of its factory, but not the number of workers it employs.
C.The firm can vary the number of workers it employs, but not the size of its factory.
D. The firm can vary neither the size of its factory nor the number of workers it employs.

50. The marginal product of an input in the production process is the increase in:
A. total revenue obtained from an additional unit of that input.
B. profit obtained from an additional unit of that input.
C. total revenue obtained from an additional unit of that input.
D. quantity of output obtained from an additional unit of that input.

51. Fixed costs can be defined as costs that:
A. vary inversely with production.
B. vary in proportion with production.
C. are incurred only when production is large enough.
D. are incurred even if nothing is produced.

52. When marginal cost is less than average total cost:
A. marginal cost must be falling.
B. average variable cost must be falling.
C. average total cost is falling.
D. average total cost is rising.

53. Marginal cost is equal to average total cost when:
A. average variable cost is falling.
B. average fixed cost is rising.
C. marginal cost is at its minimum.
D. average total cost is at its minimum.

54. If marginal product is rising:
A. marginal cost will be falling.
B. marginal cost will be increasing.
C. marginal cost will be constant.
D. There is no relationship between marginal product and marginal cost.

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