Practice_Ch8_ - Chapter 8 Practice Test The Costs of...

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Chapter 8 Practice Test The Costs of Production 1. The WXY Corporation has fixed costs of $50. Its total variable costs (TVC) vary with output as shown in the following table. Output TVC 1 $ 0 2 70 3 110 4 160 5 220 Refer to the table. The average total cost of 4 units of output is: a. $27.50 b. $40.00 c. $52.50 d. $210.00 Answer: c Feedback: The total cost of 4 units of output is $210 = $50 (fixed cost) + $160 (total variable cost.) To find average total cost, divide this by the number of units of output: $210 / 4 = $52.50 per unit. 2. Answer the next question based on the cost data in the following table: Output Average fixed cost Average variable cost 1 $120 $40 2 60 30 3 40 25 4 30 30 5 24 40 6 20 55 Refer to the data. The total cost of producing 5 units of output is: a. $64 b. $200 c. $320 d. $400 Answer: c Feedback: The average total cost of 5 units is the sum of average fixed cost and average variable cost, or $24 + $40 = $64 in this example. Total cost is then found as average total cost times the number of units of output: ATC = $64 x 5 = 320.
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3. It is often unnecessary to graph the firm’s average fixed cost because it can always be found as: a. the vertical distance between the average total cost and average variable cost curves b. the vertical distance between the average total cost and marginal cost curves c. the area under the total cost curve d. the area under the total variable cost curve Answer: a Feedback: By definition, total cost is the sum of variable cost and fixed cost. Dividing everything by output, average total cost is the sum of average variable cost and average fixed cost. The latter is represented graphically as the distance between ATC and AVC. 4. Use the following graph to answer the next question: The diagram shows the short-run average total cost curves for five different plant sizes for a firm. The firm experiences economies of scale over the range of plant sizes: a. 1 through 2 only b. 1 through 3 only c. 1 through 5 d. 3 through 5 only Answer: b Feedback: If a firm is experiencing economies of scale, its short-run average total cost curves will be declining. 5. Explicit costs and implicit costs: a. are alike in that both represent opportunity costs b. are alike in that both reflect an outlay of cash c. are alike in that both are deducted from revenue to find accounting profit d. differ in that only explicit costs are deducted from revenue to find economic profit Answer: a Feedback: Economic profit is equal to revenue minus the opportunity cost of the firm’s resources, where these costs may be either explicit or implicit.
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6. Suppose that at its current output level, a firm’s average fixed cost is $20, its average total cost is $40, its wage is $10 per hour, and labor’s marginal product is 2 units per hour. The firm’s marginal cost is: a. $40 b. $30 c. $10 d. $5 Answer: d Feedback: The firm’s marginal cost is equal to the cost of its labor (per worker) divided by labor’s marginal product. In this example, the marginal worker adds 2 units to production and costs $10;
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This note was uploaded on 02/22/2011 for the course ECON 2023 taught by Professor Meier during the Spring '11 term at St. Petersburg College.

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Practice_Ch8_ - Chapter 8 Practice Test The Costs of...

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