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Unformatted text preview: 202 PARTS FiR " .EHAVIOR AND THE ORGANIZATION OF INDUSTRY If total revenue is $100, explicit costs are $50, and implicit ﬁsts are $30, then ac counting proﬁt equals $50. if there are implicit costs of production, accounting .oﬁts will exceed economic p . fits.
When production function gets ﬂatter, the if a firm c tinues to employ more work swithin the same size factory, it will
eventually e erience diminishing mar a‘l product. .ginal product is increasing. exhibits diminishing marginal product, the
the firm will become ﬂatter as the quantity of If the productio metion for a fir
corresponding tot output expands.
Fixed costs plus variable sts equal total costs.
Average total costs ar otal c is divided by marginal costs. When marginal c
falling. s are below verage total costs, average total costs must be If, as the qu ity produced increases, a aroduction function first exhibits increas
ing margi c 1 product and later diminishi margin al product, the corresponding
‘ —cost curve wil] be U—shaped. veragetotalcost curve crosses the marg‘ ' 1—cost curve at the minimum of ma rginalcost curve. The averagetotalcost curve in the long run is flatter 12111 the averagetotalcost
curve in the short run. The efficient scale for a firm is the quantity of Output tha
cost. minimizes marginal In the long run, as a ﬁrm expands its production facilities, it general first experiw
ences diseconornies of scale, then constant returns to scale, and final] economies
of scale. ' Multiple—Choice Questions 1. Accounting proﬁt is equal to total revenue minus
a. implicit costs. explicit costs.
c. the sum of implicit and explicit costs.
d. marginal costs.
e. variable costs. Economic profit is equal to total revenue minus
a. implicit costs.
b. explicit costs.
© the sum of implicit and explicit costs.
ci. marginal costs.
e. variable costs. Use the following information to answer questions 3 and 4. Madelyn owns a small pottery factory.
She can make 1,000 pieces of pottery per year and sell them for $100 each. It costs Madelyn $20,000
for the raw materials to produce the 1,000 pieces of pottery. She has invested $100,000 in her factory
and equipmtmt: $50,000 from her savings and $50,000 borrowed at 10 percent (assume that she could
have loaned her money out at 10 percent, too). Madelyn can work at a competing pottery factory for $40,000 per ye El 1". CHAPTER 13 THE COSTS OF PRODUCTION 203 3. The accounting proﬁt at Madelyn’s pottery factory is
a. $30,000.
b. $35,000.
c. $70,000.
@svsouo.
e. $80,000. 4. The economic proﬁt at Madeiyn’s pottery factory is $30,000.
b. $35,000.
c. $70,000.
d. $75,000.
e. $80,000. 5. If there are implicit costs of production, “an: economic proﬁt will exceed accounting profit. Lb)? accounting profit will exceed economic proﬁt. c. economic proﬁt and accounting proﬁt will be equal.
(1. economic profit will always be zero. e. accounting proﬁt will always be zero. 6. 145,23 production function exhibits diminishing marginal product, its slope
becomes ﬂatter as the quantity of the input increases.
l5: becomes steeper as the quantity of the input increases.
c. is linear (a straight line).
d. could be any of the above. 7. If a production function exhibits diminishing marginal product, the slope of the
corresponding totalcost curve
a}, becomes ﬂatter as the quantity of output increases.
fibgibecomes steeper as the quantity of output increases. c. is linear (a straight line}.
d. could. be any of the above. Use the following information to ansWer questions 8 and 9. Number of Workers Output 0 0
’l 23
2 40
3 50 8. The marginal product of labor as production moves from employing one worker
to employing two workers is
a. 0.
13, 10.
"c. ‘ 17.
"d‘.’ 23.
e. 40. 9. The production process described above exhibits
constant marginal product of labor.
increasing marginal product of labor. diminishing marginal product of labor. . increasing returns to scale. decreasing returns to scale. re 91059“? 204 PART 5 FIRM BEHAVFOR AND THE ORGANFZATEON OF INDUSTRY 10. Which of the following is a variable cost in the short run? wages paid to factory labor
b. payment on the lease for factory equipment
(3. rent on the factory
d. interest payments on borrOWed financial capital
e. salaries paid to upper management Use the following infOrrnation to answer questions 1] through 1.4. Quantity Fixed Variable Total Marginal
of Output Costs Costs _ Eggts__ __________C_1£§:cg.__l 0 $10 $0 ..__H__ 1 10 5 _____ 2 10 11 WI " 3 1 0 'l 8 __w__ _ 4 10 26 _ _  i
5 10 36 —__ 171. The average fixed cost producing four units is
a. $26. .
b. $10.
:2. $5.
(3?) $2.50.
e7 none of the above. I 12. The average total cost of producing three units is
a. $3.33. 13. The marginal cost of changing production from three units to Four units is
a. $5.
b. $6.
c. $7.
@ $8. e. $9. 14. The efficient scale of production is
a. one unit.
13. two units.
c. three units. four units.
e. five units. 15. When marginal costs are below average total costs,
a. average fixed costs are rising. average total costs are fa] ling.
if average total costs are rising.
(:1. average total costs are minimized. CHAPTER 13 THE COSTS OF PRODUCTION 205 16. If marginal costs equal average total costs,
a. average total costs are rising.
b. average total costs are falling. average total costs are minimized.
. average total costs are maximized. 17. If, as the quantity produced increases, a production function ﬁrst exhibits increas—
ing marginal product and later diminishing marginal product, the corresponding
marginalcost curve will
{19. slope upward. he U—shaped. '
c. slope downward.
d. be ﬂat (horizontal). 18. In the long run, if a very small factory were to expand its scale of operations, it is
likely that it would initially experience
economies of scale.
. constant returns to scale.
c. diseconomies of scale.
d. an increase in average total costs. 19. The efficient scale of production is the quantity of output that minimizes
{"55 average total cost. ‘
marginal. cost.
c. average fixed cost.
d. average variable cost. 20. Which of the following statements is true?
fa; All costs are ﬁxed in the longr run.
{‘13.} All costs are variable in the long run.
c. All costs are fixed in the short run. (:1. All costs are variable in the short run. ADVANCED CRITICAL THINKING Your friend a large garden and grows fresh fruit and vegetables to be sold at a local “farmer’s
market.” Your frie comments, “I hired a college student who was on summer vacation to help me
this summer and my duction more than doubled. Next summer, I think I’ll hire two or maybe
three helpers and my outp should go up more than three or fourfold." 1. lf all produc ' n processes eventually exhibit diminishing rginal product of
the variable inpu could it be true that your friend hi a helper (doubled the
labor) and more than oubled his production? W . . ...
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 Spring '11
 BROWN
 Economics of production, average total costs, Madelyn

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