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105 Cards in this Set

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Two small airlines provide shuttle service between Las Vegas and Reno. Thervices are alike in every respect except that Fly Right bought its airplace for $500,000, while Fly by Night rents its plane for $30,000 a year. If Fly Right were to go out of business, it owuld be able to rent its place to another airline for $30,000. Which airline has the lower costs?
Neither, the costs are identical
Which of the following statements is true regarding the differences between economics and accounting costs?
Accounting costs include only explicit costs
Prospective sunk costs
are relevant to economic decision-making
Consider the following statements when answering this question.
1. Increases in the rate of income tax decrease the opportunity cost of attending college.
2. The introduction of distance learning, which enables students to watch lectures at home, decreases the opportunity cost of attending college.
1 and 2 are both true
Incremental cost is the same concept as ________ cost
marginal
The total cost (TC) of producing computer software diskettes (Q) is given as TC=200+5Q. What is the fixed cost?
200
The total cost (TC) of producing computer software diskettes (Q) is given as TC=200+5Q. What is the average fixed cost?

A.) 500 B.) 5Q C.) 5 D.) 5+(200/Q) E.) None
None of the above
Jim left his previous job as a sales manager and started his own sales consulting business. He previously earned $70,00 per year, but he now pays himself $25,000 per year while he is building the new bsuiness. What is the economic cost of the time he contributes to the new business?
$45,000 per year
From example 7.2, most pizza restaurants have large fixed costs and relatively low variable costs. What does this tell us about the average variable cost (AVC) of producing pizza?
AVC is relatively low
Use the following two statements to answer this question: 1. The average cost curve and the average varibale cost curve reach their minima at the same level of output
2. the average cost curve and the marginal cost curve reach their minima at the same level of output
Both 1 and 2 are false
For any given level of output:
A. marginal cost must be greater than average cost.
B. Average variable cost must be greater than average fixed cost.
C. Average fied cost must be greater than average variable cost
D. fixed cost must be greater than variable cost.
E. None of the above is necessarily correct
E. None of the above is necessarily correct
Which of the following relationships is not valid?
Rising marginal cost implies that average total cost is also rising
Consider the following statements when answering this question:
1. If a firm employs only one variable factor of production, lbaor, and the marginal product of labor is constant, then the marginal costs of production are constant too.
2. If a firm employs only one variable factor of production, labor, and the marginal product of labor is constant, then the short-run average total costs cannot rise as output rises.
1 and 2 are both true
Consider the following statements when answering the question:
1. the marginal cost curve intersects the average total cost and average variable cost curves at their minimum values.
2. When a firm has positive fixed costs, the output level associated with minimum average variable costs is less than the output associated with minimum average total costs
1 and 2 are both true
In the short run, suppose average total cost is a straight line and marginal cost is positive and constant. Then, we know that:
A.) average total cost is positive and constant.
B.) average total cost equals marginal cost
Trisha believes the production of a dress requires 4 labor hours and 2 machine hours to produce. If Trisha decides to operate in the short run, she must spend $500 to lease her business space. Also, a labor hour costs $15 and a machine hour costs $35. What is Trisha's cost of production as a function of dresses produced?
Since the production of a dress requires spending $60 for labor and $70 for machine hours, Trisha's cost function is C(q)=130q+500
Assume that a firm spends $500 on two inputs, labor (graphed on the horizontal axis) and capital (graphed on the vertical axis). If the wage rate is $20 per hour and the rental cost of capital is $25 per hour, the slope of the isocost curve will be:
-4/5
With its current levels of input use a firm's MRTS is 3 (when capital is on the vertical axis and labor is ont he horizontal axis). This implies
the marginal product of labor is three times the marginal product of capital
A firm wants to minimize the total cost of producing 100 tons of dynamite. The firm uses two factors of production, chemicals, and labor. The combination of chemicals and labor that minimizes production costs will be found where
the production of an additional unit of dynamite costs the same regardless of whether chemicals or labor are used
Suppose our firm produces chartered business flights with capital (planes) and labor (pilots) in fixed proportion (i.e., one pilot for each place). The expansion path for this business will:
follow the 45-degree line from the origin
If two different fuel sources (e.g. coal and natural ga) are perfect substitutes in the long-run production of energy. How will a profit maximizing firm choose between these two inputs?
the firm will only use the input with lower cost
Assume that a firm's production process is subject to increasing returns to scale over a broad range of outputs. Long-run average costs over this output will tend to
decline
The cost-output elasticity equals 1.4. This implies that:
there are diseconomies of scale
When there are economies of scale
MC<AC, so cost-output elasticity is less than 1
To model the input decisions for a production system, we plot labor on the horizontal axis and capital on the vertical axis. In the short run, labor is a variable input and capital is fixed. The short-run expansion path for this production system is:
a horizontal line
Suppose the long-run cost function is C=3q. What is the cost-output elasticity for this case?
Answer: 1
Economies of scope refer to:
multiproduct firms
When a product of transformation curve for a firm is bowed inward, there are ___________ in production.
diseconomies of scope
Bubba Burgers has discovered there are economies of scope available to the restaurant. Which is most likely to be a response to this discover?
Bubba adds grilled chicken sandwiches to the menu.
Suppose a firm has multiproduct cost function that is additive such that C(q1,q2)=C(q1)+C(q2). What is the degree of economies of scope (SC) for this firm?
Zero
Which of the following is NOT a reason for average costs to fall according to the learning curve/
Competing firms leave the industry as the learning firm becomes more efficient
The presence of a learning curve may induce a decision maker in a startup firm to choose
high levels of output to shift the average cost curve down over time
A group of friends recently started manufacturing specialty T-shirts. The business has grown rapidly, with monthly production up from 50 to 250 in the first 6 months. During the same period, average production cost has been cut in half. The firm's long-run average cost curve over this range of output

A.) is downward sloping.
B.) is upward sloping.
C.) is horizontal
may be any of the above
A learning curve may be expressed as a relationship between the labor per unit (L) and the cumulative number of units produced (N). Which of the following learning curves exhibits a faster reduction in cost of production due to learning.
1.) L=10+N-1
or
2.) L=10+N-0.5
Learning curve 1
A variable cost function fo the form: VC=52+2Q+3Q2 implies a marginal cost curve that is
upward sloping
The scale economies index (SCI) is equal to:
one minus the cost-output elasticity
Which of the following is a key assumption of a perfectly competitive market?
Each seller has a very small share of the market
Firms often use patent rights as a
barrier to entry
Use the following statements to answer this question:
1. Markets may be highly (but not perfectly) competitive even if there are a few sellers.
2. There is no simple indicator that tells us when markets are highly competitive
1 and 2 are true
If managers do not choose to maximize profit, but pursue some other goal such as revenue maximization or growth,
they are more likely to become takeover targets of profit-maximizing firms
If any of the assumptions of perfect competition are violated,
one must use the monopoly model instead
An association of businesses that are jointly owned and operated by members for mutual benefit is a:
cooperative
What do cooperative firms do if they make a profit?
Cooperatives generally return the profits to their members as a dividend
A firm maximizes profit by operating at the level of output where
marginal revenue equals marginal cost
If current output is less than the profit-maximizing output, then the next unit produced
will increase revenue more than it increases cost
At the profit-maximizing level of output, marginal profit
is zero
The perfectly competitive firm's marginal revenue curve is
horizontal
The amount of output that a firm decides to sell has no effect on the market price in a competitive industry because
the firm's output is a small fraction of the entire industry's output
Suppose the state legislature in your state imposes a state licensing fee of $100 per year to be paid by all firms that file state tax revenue reports. This new business tax:
A.) increases marginal cost
B.) decreases marginal cost
C.) increases marginal revenue
D.) decreases marginal revenue
E.) none of the above
E.) none of the above
Use the following statements to answer this question:
1. The firm's decision to produce zero output when the price is less than the average variable cost of production is known as the shutdown rule.
2. The firm's supply decision is to generate zero output for all prices below the minimum AVC
Both 1 and 2 are true
The supply curve for a competitive firm is
its MC curve above the minimum point of the AVC curve
Short-run supply curves for perfectly competitive firms tend to be upward sloping because:
A.) there is diminishing marginal product for one or more variable inputs
B.) marginal costs increase as output increases
C.) marginal fixed costs equal zero
Both A and B are correct
Use the following statements to answer this question:
1. An increase in the firm's fixed costs will also shift the firm's short-run supply curve to the left.
2. An increase in the firm's fixed costs will not shift the firm's short-run supply curve to the right or left, but it may alter how much of the marginal cost curve is used to form the short-run supply curve.
Both 1 and 2 are false
A firm's producer surplus equals its economic profit when
fixed costs are zero
Three hundred firms supply the market for paint. For fifty of the firms, their short-run average variable costs are minimized at $10 and short-run total costs are minimized at $15. For the remaining firms, the short-run average variable costs and short-run average total costs are minimized at $20 and $25, respectively. If each firm has a U-shaped marginal cost curve then the short-run market supply curve is
kinked at $20
Suppose all firms have constant marginal costs that are the same for each firm in the short run. In this case, the market level supply curve is ________ and producer surplus equals ________
perfectly elastic; zero
Which of the following is NOt a necessary condition for long-run equilibrium under perfect competition?
Prices are relatively low
The authors explain that a firm earning a zero economic profit inn the long run has earned a competitive return on their investment. What do they mean by "competitive" return in this context?
The firm's return is at least as larger as could be earned in another investment
Scenario 8.2: Yachts are produced by a perfectly competitive industry in Dystopia. Industry output (Q) is currently 30,000 yachts per year. The gov't, in an attempt to raise revenue, places a $20,000 tax on each yacht. Demand is highly, but not perfectly, elastic.
Refer to scenario 8.2. The result of the tax in the long run will be that:
Q falls from 30,000; P rises by less than $20,000
The long-run supply curve in a constant-cost industry is linear and
horizontal
Which of the following cases are examples of industries that have potentially increasing costs due to scarce inputs?
D.) all of the above: petroleum production, medical care, legal services
Suppose the market demand curve is perfectly elastic in an increasing-cost industry. If an output tax of t per unit is imposed on all producers of the good, what happens to the market equilibrium outcome?
the price paid by buyers does not change and output decrease
A production function defines the output that can be produced
in a give time period if no additional inputs are hired
Use the following two statements to answer this question:
1. Production functions describe what is technically feasible when the firm operates efficiently.
2. The production function shows the least cost method of producing a given level of output
1 is true, 2 is false
Which of the following inputs are variable in the long run?
D.) all of the above: labor, capital and equipment, and plant size
Joe owns a small coffee shop and his production function is q=3KL where q is total output in cups per hour, K is the number of coffee machines (capital), and L is the number of employees hired per hour (labor). If Joe's capital is currently fixed at K=3 machines, what is his short-run production function?
q=9L
Suppose there are ten identical manufacturing firms that produce computer chips with machinery (capital, K) and labor (L), and each firm has a production function of the form q=10KL0.5. What is the industry-level production function?
Q=100KL0.5
We manufacture automobiles given the production function q=5KL where q is the number of autos assembled per eight-hour shift, K is the number of robots used on the assembly line (capital) and L is the number of workers hired her hour (labor). If we use K=10 robots and L=10 workers in order to produce q=450 autos per shift, then we know that production is:
technologically inefficient
Which of the following equations based on capitals (K) and labor (L) inputs does not represent a plausible production function?
F(K,L)=K+L-1
Writing total output as Q, change in output as DQ, total labor employment as L, and change in labor employment as DL, the marginal product of labor can be written algebraically as
ΔQ/ΔL
The slope fo the total product curve is the
marginal product
The marginal product of an input is
the addition to total output due to the addition of the last unit of an input, holding all other inputs constant
When the average product is decreasing, marginal product
is less than average product
Which of the following ideas were central to the conclusion drawn by Thomas Malthus in his 1798 "Essay of the Principle of Population"?
Law of diminishing returns
According to the law of diminishing returns
the marginal product of an input will eventually decline
Use the following two statements to answer this question:
1. The marginal product of labor is the slope of the line from the origin to the total product curve at that level of labor usage.
2. The average product of labor is the slope of the line that is tangent to the total product curve at that level of labor usage
Both 1 and 2 are false
In a certain textile firm, labor is the only short term variable input. The manager notices that the marginal product of labor is the same for each unit of labor, which implies that:
the average product of labor is always equal to the marginal product of labor
The Malthusian dilemma relates to marginal product in that
because of diminishing marginal product, the amount of food produced by each additional member of the population decreases.
Marginal product crosses the horizontal axis (is equal to zero) at the point where
total product is maximized
Assume the average product for size workers is fifteen. If the marginal product of the seventh worker is eighteen,
average product is rising
The link between the productivity of labor and the standard of living is
that over the long run, consumers as whole can increase their rate of consumption only by increasing labor productivity
Which would not increase the productivity of labor?
an increase in the size of the labor force
One of the factors contributing to the fact that labor productivity is higher in the U.S. than in the People's Republic of China is
the higher capital/labor ratio in the U.S.
You operate a car detailing business with a fixed amount of machinery (capital), but you have recently altered the number of workers that you employ per hour. Three employees can generate an average product of 4 cars per person in each hour, and five employees can generate an average product of 3 cars per person in each hour. What is the marginal product of labor as you increase the labor from three to five employees?
MP=1.5 cars
You operate a car detailing business with a fixed amount of machinery (capital), but you have recently altered the number of workers that you employ per hour. As you increased the number of employees hired per hour. As you increased the number of employees hired per hour from three to five, your total output increased by 5 cars to 15 cars per hour. What is the average product of labor at the new levels of labor?
AP=3 cars per worker
Joe owns a coffee house and produces coffee drinks under the production function q=5KL where q is the number of cups generated per hour, K is the number of coffee machines (capital), and L is the number of employees hired per hour (labor). What is the average product of labor?
AP=5K
Joe owns a coffee house and produces coffee drinks under the production function q=5KL where q is the number of cups generated per hour, K is the number of coffee machines (capital), and L is the number of employees hired per hour (labor). What is the marginal product of labor?
MP=5K
Joe owns a coffee house and produces coffee drinks under the production function q=5KL where q is the number of cups generated per hour, K is the number of coffee machines (capital), and L is the number of employees hired per hour (labor). The average product of labor and the marginal product of labor are both equal to AP=MP=5K. Does labor exhibit diminishing marginal returns in this case?
No, the marginal product of labor is constant (for a given K)
If we take the production function and hold the level of output constant, allowing the amounts of capital and labor to vary, the curve that is traced out is called
an isoquant
Use the following two statements to answer this question:
1. Isoquants cannot cross one another
2. An isoquant that is twice the distance from the origin represents twice the level of output
1 is true and 2 is false
Use the following two statements to answer this question:
1. If the marginal product of labor is zero, the total product of labor is at its maximum.
2. If the marginal product of labor is at its maximum, the average product of labor is falling
1 is true and 2 is false
The rate at which one input can be reduced per additional unit of the other input, while holding output constant, is measured by the
marginal rate of technical substitution
The marginal rate of technical substitution is equal to the
ratio of the marginal products of the inputs
If the isoquants are straight lines, then
the marginal rate of technical substitution of inputs is constant
An L shaped isoquant
would indicate the capital and labor are perfect substitutes in production
If the isoquants in an isoquant map are downward sloping but bowed away from the origin (i.e. concave to the origin), then the production technology violates the assumption of:
diminishing marginal returns
Which of the following examples represents a fixed-proportion production system with capital and labor inputs?
All of the above: clerical staff and computers, airplanes and pilots, horse-drawn carriages and carriage drivers
Suppose the production of long-distance airline flights is described by a fixed proportion production process in which three crew members (i.e., labor) are required for each aircraft (i.e., capital). If the airline operates with four crew members per plane, then we know that:
production at this point is technically inefficient
Joe's Organic Cereal Company produces granola breakfast cereal under a fixed proportion production system in which 22 ounces of cereal are packaged in each cardboard box. However, the plant production manager decides to reduce the amount of cereal per box to 20.5 ounces at the start of the next year. For the isoquant map, cereal is plotted in the vertical axis, and boxes are on the horizontal axis. What happens to the curves in the isoquant map as a result of this change?
Shift downward
In a production process, all inputs are increased by 10%; but output increases less than 10%. This means that the firm experiences
decreasing returns to scale
Increasing returns to scale in production means
less than twice as much of all inputs are required to double output
Which of the following production functions exhibits constant returns to scale?
q=K+L
Why do firms tend to experience decreasing returns to scale at high levels of output?
Firms face more problems with coordinating tasks and communications among mangers and workers at very high levels of output
Many mining and mineral extraction processes tend to exhibit increasing returns to scale. Suppose copper mines have increasing returns, and the existing copper mines reduce their capital and labor inputs by 25% in response to a global recession. What is the expected impacts on copper output?
Output decreases by more than 25%
Two soft-drink firms, Fizzle & Sizzle, operate on a river. Fizzle is farther upstream, and gets cleaner water, so its cost of purifying water for use in the soft drinks is lower than Sizzle's by $500,000 yearly.

According to Scenario 8.1, Fizzle and Sizzle
may or may not be perfect competitors, but their position on the river has nothing to do with it.