# Costs and Learning Objective

What is the week’s economic profit for the Do Drop In? A. -\$320. B. -\$40. C. \$280. D. \$320. E. \$1,050. 8. Which of the following statements about the marginal product of labour is correct? A. It may either rise or fall as more labour is used. B. It always rises as more labour is used. C. It always falls as more labour is used. D. There is no relationship between marginal product and labour. 9. What causes marginal cost to increase? A. The advantages of the division of labour. B. The fact that ATC increases. C. Raising marginal product. D. The law of diminishing returns. 0. Which of the following statements regarding average fixed costs is correct? A. They are constant since fixed costs are fixed. B. They are equal to average variable cost less average total cost. C. When graphed, they are a horizontal line. D. When graphed, they are a straight line which comes out of the origin. E. They fall continuously as output increases. 11. Which of the following is a variable cost? A. The leasehold cost of a building. B. Insurance on the factory’s physical plant. C. Raw materials. D. The cost of a marketing research report. 12.

What is the sum of total variable costs and total fixed costs? A. It is equal to the sum of average product and marginal product. B. It is the sum of all marginal costs. C. It is total cost. D. It is AVC times the quantity of output. 13. Can a firm earn an economic loss and an accounting profit at the same time? Explain. 14. What is meant by the term economic capacity? A. An output level where the firm is physically unable to increase output. B. The output level where average variable cost is at a minimum. C. The output level where average total cost is at a minimum. D. Total fixed costs are at a minimum. 5. Which of the following statements is correct if a firm’s capacity output increases from 300 to 600 and its total costs rise from \$40,000 to \$78,000? A. The firm is experiencing constant returns to scale. B. The firm is experiencing decreasing returns to scale. C. The firm is experiencing increasing returns to scale. D. The firm’s long-run average cost must have decreased but its short-run average cost could have either decreased or increased. 16. The existence of both economies of scale and diseconomies of scale would have what effect on the LRAC curve? A. It would make it upward-sloping. B.

It would make it downward-sloping. C. It would give it an inverse U shape. D. It would give it a U shape. E. It would make it horizontal. 17. All of the following, except one, are examples of pecuniary economies of scale. Which is the exception? A. A lower interest rate paid on money borrowed. B. The ability to sell the by-products of production. C. The ability to use specialized inputs such as a robotics assembly line. D. The ability to obtain lower prices by buying in bulk. 18. What is the shape of the LRAC curve for a firm enjoying diseconomies of scale? 19. Which of the following refers to the perfectly competitive firm?

A. It is a price-maker. B. It is a price-taker. C. It might be either a price-maker or a price-taker. D. It is neither a price-maker nor a price-taker. 20. What is the term for the extra revenue derived from the sale of one more unit? A. Average revenue. B. Marginal revenue. C. Net revenue. D. Total revenue. 21. What is average revenue? A. The price multiplied by the quantity sold. B. The total revenue divided by the price. C. The extra revenue derived from the sale of one more unit. D. It is equal to the price in perfectly competitive markets. 22. What is break-even output? A.

The output at which the total revenue just covers a firm’s total fixed cost. B. The output at which the total revenue just covers a firm’s total variable cost. C. The output at which the total revenue just covers a firm’s fixed and variable costs including normal profits. D. The output at which the firm is making zero normal profits. 23. Which of the following is the correct sequence of events following a decrease in demand for a product in a perfectly competitive market? A. A decrease in the price and in the total profits of the representative firm which causes new firms to enter the industry. B.

A decrease in the price and in the total profits of the representative firm which causes firms to leave the industry. C. A decrease in the price but an increase in the total profits of the representative firm which causes new firms to enter the industry. D. An increase in the price but a decrease in the total profits of the representative firm which causes firms to leave the industry. 24. How is average revenue defined? A. It is the extra revenue derived from the sale of one more unit. B. It is the total revenue divided by the number of units sold. C. It is marginal revenue divided by the number of units sold. D.

It is the sum of the marginal revenue of all units sold. 25. Which of the following markets provide the best example of a perfect competition? A. Automobile manufacturing. B. Restaurants. C. Oil refining. D. Wheat farming. 26. Explain why a perfectly competitive firm faces a horizontal demand curve? 27. Explain why average revenue is equal to marginal revenue for a perfectly competitive firm? 28. The supply curve for a perfectly competitive firm is that portion of its marginal cost curve that lies above its average variable cost curve. Explain why? Micro Review Quiz Test 2 Key 1. (p. 143) When is marginal utility equal to zero?

To see why this is the case, think about each purchase individually, and pick the item that will give you the highest MU/P. Reasoning in this way, you would make the following decisions: First dollar spent on a taco Second through fourth dollars spent on one taco and one burrito Fifth dollar spent on a taco Sixth and seventh dollars spent on a burrito Eighth through tenth dollars spent on one taco and one burrito After this allocation, the MU/P for each item is the same (and equal to 4). Difficulty: Difficult Learning Objective: 05-02 Derive a consumers purchasing rule that ensures satisfaction is maximized.

Sayre – Chapter 05 #130 Source: Text Topic: Optimal Purchasing Rule Type: Computation Type: Pickup Below are some financial data for the Do Drop In convenience store. The owners have put \$40,000 into the business and they worked a total of 80 hours during the week. Savings accounts are currently paying 5. 2% interest and the going wage rate is \$8 per hour. Sayre – Chapter 06 7. (p. 182) Refer to the information above to answer this question. What is the week’s economic profit for the Do Drop In? A. -\$320. B. -\$40. C. \$280. D. \$320. E. \$1,050. Difficulty: Easy

Learning Objective: 06-01 Understand how and why economists measure costs differently from how accountants do and distinguish between the accountants and economists views of profits. Sayre – Chapter 06 #10 Source: Text Topic: Explicit and Implicit Costs Type: Computation Type: Pickup 8. (p. 185) Which of the following statements about the marginal product of labour is correct? A. It may either rise or fall as more labour is used. B. It always rises as more labour is used. C. It always falls as more labour is used. D. There is no relationship between marginal product and labour.

Difficulty: Easy Learning Objective: 06-02 Understand the crucial relationship between productivity and costs. Sayre – Chapter 06 #23 Source: Text Topic: Theory of Production Type: Comprehension Type: Pickup 9. (p. 194) What causes marginal cost to increase? A. The advantages of the division of labour. B. The fact that ATC increases. C. Raising marginal product. D. The law of diminishing returns. Difficulty: Easy Learning Objective: 06-04 List and graph the seven specific cost definitions used by economists. Sayre – Chapter 06 #75 Source: Text Topic: Total Costs and Average Total Costs

Type: Comprehension Type: Pickup 10. (p. 193) Which of the following statements regarding average fixed costs is correct? A. They are constant since fixed costs are fixed. B. They are equal to average variable cost less average total cost. C. When graphed, they are a horizontal line. D. When graphed, they are a straight line which comes out of the origin. E. They fall continuously as output increases. Difficulty: Easy Learning Objective: 06-04 List and graph the seven specific cost definitions used by economists. Sayre – Chapter 06 #84 Source: Text Topic: Total Costs and Average Total Costs

Type: Comprehension Type: Pickup 11. (p. 190) Which of the following is a variable cost? A. The leasehold cost of a building. B. Insurance on the factory’s physical plant. C. Raw materials. D. The cost of a marketing research report. Difficulty: Easy Learning Objective: 06-03 Understand the important difference between fixed costs and variable costs. Sayre – Chapter 06 #86 Source: Text Topic: Marginal and Variable Costs Type: Computation Type: Pickup 12. (p. 202) What is the sum of total variable costs and total fixed costs? A. It is equal to the sum of average product and marginal product.

B. It is the sum of all marginal costs. C. It is total cost. D. It is AVC times the quantity of output. Difficulty: Easy Learning Objective: 06-04 List and graph the seven specific cost definitions used by economists. Sayre – Chapter 06 #119 Source: Study Guide Topic: Total Costs and Average Total Costs Type: Definition Type: Pickup 13. (p. 182-183) Can a firm earn an economic loss and an accounting profit at the same time? Explain. Accounting profit is equal to total revenue less explicit cost and economic profits is equal to total revenue less implicit cost and explicit cost.

Suppose the firm is earning an accounting profit. If implicit cost is greater than accounting profit, there will be an economic loss. Difficulty: Easy Learning Objective: 06-05 Explain the meaning of increasing productivity and cutting costs. Sayre – Chapter 06 #158 Source: Text Topic: Explicit and Implicit Costs Type: Comprehension Type: Pickup 14. (p. 210) What is meant by the term economic capacity? A. An output level where the firm is physically unable to increase output. B. The output level where average variable cost is at a minimum. C. The output level where average total cost is at a minimum.

D. Total fixed costs are at a minimum. Difficulty: Easy Learning Objective: 07-02 Understand why medium-sized firms are sometimes just as efficient as big firms. Sayre – Chapter 07 #3 Source: Text Topic: Constant Returns to Scale Type: Definition Type: Pickup 15. (p. 213) Which of the following statements is correct if a firm’s capacity output increases from 300 to 600 and its total costs rise from \$40,000 to \$78,000? A. The firm is experiencing constant returns to scale. B. The firm is experiencing decreasing returns to scale. C. The firm is experiencing increasing returns to scale. D.

The firm’s long-run average cost must have decreased but its short-run average cost could have either decreased or increased. Difficulty: Easy Learning Objective: 07-03 Understand why big firms sometimes enjoy great cost advantages. Sayre – Chapter 07 #17 Source: Text Topic: Economies of Scale Type: Definition Type: Pickup 16. (p. 218) The existence of both economies of scale and diseconomies of scale would have what effect on the LRAC curve? A. It would make it upward-sloping. B. It would make it downward-sloping. C. It would give it an inverse U shape. D. It would give it a U shape. E.

It would make it horizontal. Difficulty: Easy Learning Objective: 07-06 Explain what is meant by the right size of firm. Sayre – Chapter 07 #46 Source: Text Topic: What is the Right Size of Firm? Type: Comprehension Type: Pickup 17. (p. 224) All of the following, except one, are examples of pecuniary economies of scale. Which is the exception? A. A lower interest rate paid on money borrowed. B. The ability to sell the by-products of production. C. The ability to use specialized inputs such as a robotics assembly line. D. The ability to obtain lower prices by buying in bulk. Difficulty: Easy

Learning Objective: 07-03 Understand why big firms sometimes enjoy great cost advantages. Sayre – Chapter 07 #75 Source: Study Guide Topic: Economies of Scale Type: Comprehension Type: Pickup 18. (p. 215) What is the shape of the LRAC curve for a firm enjoying diseconomies of scale? The long-run average cost curve is upward-sloping when the firm is experiencing diseconomies of scale; an increase in output will lead to an increase in the average cost. Difficulty: Easy Learning Objective: 07-04 Understand why firms can sometimes be too big. Sayre – Chapter 07 #120 Source: Text Topic: Why Firms can be too Big

Type: Comprehension Type: Pickup 19. (p. 232) Which of the following refers to the perfectly competitive firm? A. It is a price-maker. B. It is a price-taker. C. It might be either a price-maker or a price-taker. D. It is neither a price-maker nor a price-taker. Difficulty: Easy Learning Objective: 08-02 Explain what is meant by perfect competition and the market system. Sayre – Chapter 08 #6 Source: Text Topic: Perfect Competition and the Market System Type: Definition Type: Pickup 20. (p. 239) What is the term for the extra revenue derived from the sale of one more unit? A. Average revenue. B. Marginal revenue.

C. Net revenue. D. Total revenue. Difficulty: Easy Learning Objective: 08-03 Use two approaches to explain how a firm might maximize its profits. Sayre – Chapter 08 #12 Source: Text Topic: The Competitive Industry and Firm Type: Definition Type: Pickup 21. (p. 238) What is average revenue? A. The price multiplied by the quantity sold. B. The total revenue divided by the price. C. The extra revenue derived from the sale of one more unit. D. It is equal to the price in perfectly competitive markets. Difficulty: Easy Learning Objective: 08-03 Use two approaches to explain how a firm might maximize its profits.

Sayre – Chapter 08 #13 Source: Text Topic: The Competitive Industry and Firm Type: Definition Type: Pickup 22. (p. 239) What is break-even output? A. The output at which the total revenue just covers a firm’s total fixed cost. B. The output at which the total revenue just covers a firm’s total variable cost. C. The output at which the total revenue just covers a firm’s fixed and variable costs including normal profits. D. The output at which the firm is making zero normal profits. Difficulty: Easy Learning Objective: 08-03 Use two approaches to explain how a firm might maximize its profits. Sayre – Chapter 08 #26

Source: Text Topic: The Competitive Industry and Firm Type: Definition Type: Pickup 23. (p. 254) Which of the following is the correct sequence of events following a decrease in demand for a product in a perfectly competitive market? A. A decrease in the price and in the total profits of the representative firm which causes new firms to enter the industry. B. A decrease in the price and in the total profits of the representative firm which causes firms to leave the industry. C. A decrease in the price but an increase in the total profits of the representative firm which causes new firms to enter the industry. D.

An increase in the price but a decrease in the total profits of the representative firm which causes firms to leave the industry. Difficulty: Easy Learning Objective: 08-06 Explain the effect of a change in market demand or market supply on both the industry and the firm. Sayre – Chapter 08 #100 Source: Text Topic: The Industry Demand and Supply Type: Comprehension Type: Pickup 24. (p. 260) How is average revenue defined? A. It is the extra revenue derived from the sale of one more unit. B. It is the total revenue divided by the number of units sold. C. It is marginal revenue divided by the number of units sold.

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