Part 05 Production & Costs

7/30/2019 Part 05 Production & Costs

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Production

&

Costs of Production



True or false :

1) Normal profit is an implicit cost.

2) When economic profits equal zero, normal profits are negative or equal zero.

3) In the short run, the size (or capacity) of a firm's plant is variable.

4) The law of diminishing returns states that as successive amounts of a variable

resource are added to a fixed resource, beyond some point marginal product will

diminish.

5) The law of diminishing marginal utility explains why short-run production costs

increase directly with a firm's level of output.

6) Over the range of positive, but diminishing, marginal returns for an input, the total

product curve increases at a decreasing rate.

7) When the marginal product of the variable input begins to decrease, total product

also begins to decrease.

8) When total product is increasing at a decreasing rate, marginal product is positive,

but falling.

9) The short-run marginal-cost curve is upward-sloping because of the law of

diminishing marginal returns.

10) Marginal product is highest where marginal cost is lowest.

11) If a firm increases all its inputs by 10 percent and its output increases by 15

percent, the firm is experiencing diseconomies of scale.

12) A major factor explaining economies of scale is increased specialization of

labor.



Multiple choice:

(1) Accounting profits:

A) are economic profits.

B) are similar to pure economic rents.C) equal the difference between total revenues and explicit costs.

D) equal the difference between total revenues and the sum of

implicit and explicit costs.

(2) An industry is expected to expand if firms in the industry are earning:

A) normal profits.

B) economic profits.

C) accounting profits.

D) profits that exactly cover all of the firms' opportunity costs.

(3) Normal profits are:A) the profits reported by accountants on a firm's annual financial

statement.

B) identical to economic profits.

C) determined by subtracting total costs from total revenues.

D) considered an implicit cost by economists.

(4) In the short run, output:

A) is absolutely fixed.

B) can vary as the result of using a fixed amount of plant and

equipment more or less intensively.

C) may be altered by varying the size of plant and equipment

which now exist in the industry.

D) can vary as the result of changing the size of existing plants and

by new firms entering or leaving the industry.

(5) The main difference between the short run and the long run is that:

A) firms earn zero profits in the long run.

B) the long run always refers to a time period of one year or longer

C) in the short run, one or more inputs is fixed.

D) in the long run, only one variable can be fixed.

(6) The long run is a period of time for which:

A) all resources are fixed.

B) the level of output is fixed.

C) the amount of all resources can be varied.

D) the size of the production plant is fixed.

(7) The range of diminishing marginal productivity begins when:

A) total product begins to fall.

B) average product reaches its maximum.

C) marginal product reaches its maximum.

D) marginal product begins to fall at an increasing rate.



(8) The law of diminishing returns implies:

A) the more hours you spend studying the less you will know.

B) your understanding will be increased by decreasing your

marginal study time.C) eventually, the more hours you spend studying per day, the less

you will learn with each added hour.

D) the more hours you spend studying per day, the more you will

learn with each added hour.

(9) Which statement best illustrates the law of diminishing returns?

A) The average total cost of the last unit of a resource used is less

than the average total cost of the previous resource used.

B) The marginal product of the last unit of a resource used is less

than the marginal product of the previous resource used.

C) The average product of the last unit of a resource used is lessthan the average product of the previous resource used.

D) The marginal cost of the last unit of a resource used is less than

the marginal cost of the previous resource used.

(10) The marginal product of labor shows the change in total product

resulting from a:

A) one-unit increase in the quantity of a particular resource used,

letting other resources vary.

B) one-unit increase in the quantity of a particular resource used,

holding constant other resources.

C) change in the cost of a variable resource.

D) change in the cost of a fixed resource.

(11) Average product is the:

A) level of output at which total product increases.

B) level of output at which total product decreases.

C) total output divided by the units of a variable resource.

D) maximum level of output with one variable resource and other

fixed resources.

(12) In the short run, total product begins to decrease at the point where the:

A) average product of labor is zero.

B) marginal product of labor is zero.

C) average product of labor is negative.

D) average product of labor is declining.



(13) When the total product curve is falling, the:

A) marginal product of labor is zero.

B) marginal product of labor is negative.

C) average product of labor is increasing.

D) average product of labor must be negative.

** The next question(s) are based on the following table that provides information

on the production of a product that requires one variable input.

Input 0 1 2 3 4 5 6 7 8 9

Total product 0 5 2

0

3

2

4

2

5

0

5

5

5

8

5

8

56

(14) Refer to the above table. There are increasing marginal returns through

the:

A) first unit of variable input.

B) second unit of variable input.

C) third unit of variable input.

D) fourth unit of variable input.

(15) Refer to the above table. Diminishing returns set in with the addition of

the:

A) first unit of input.

B) second unit of input.

C) third unit of input.

D) fourth unit of input.

(16) Refer to the above table. There are negative marginal returns when the:

A) fifth unit of input is added.

B) sixth unit of input is added.

C) seventh unit of input is added.

D) ninth unit of input is added.

(17) Refer to the above table. With the addition of the first unit of input, the

marginal product is:

A) 5 and the average product is 8.4

B) 5 and the average product is 5.0

C) 8 and the average product is 8.4D) 8 and the average product is 10.0

(18) After what point in the graph does the law of diminishing returns set in?

A) point A

B) point B

C) point C

D) point D



(19) Variable costs are:

A) sunk costs.

B) multiplied by fixed costs.

C) costs that change with the level of production.

D) defined as the change in total cost resulting from the productionof an additional unit of output.

(20) Fixed costs are those costs which are:

A) subject to diminishing marginal productivity.

B) embodied in the calculation of marginal cost.

C) independent of the rate of output.

D) implicit to a competitive firm.

(21) Which is the best example of a fixed cost of production to a firm?

A) depreciation of capital B) wages paid to workers

C) electricity charges D) advertising

(22) When a firm produces 10 units of output, total costs are k.d 1,030 and

average fixed costs are k.d 10, then total fixed costs are:

A) k.d5 B) k.d 100

C) k.d1020 D) k.d 1040

(23) If you know that with 8 units of output, average fixed cost is k.d 12.50

and average variable cost is k.d 81.25, then total cost at this output level is:

A) k.d 93.75 B) k.d 97.78

C) k.d 750 D) k.d 880

(24) At any level of output:

A) average variable cost will exceed average total cost in the short

run.

B) marginal cost will exceed average variable cost by the level of

average fixed cost.

C) average variable cost will exceed average fixed cost by the

level of average total cost.

D) average total cost will exceed average variable cost by the level

of average fixed cost.

(25) Marginal cost can be defined as the:

A) change in fixed cost resulting from one more unit of

production.

B) difference between fixed and variable cost at any level of

output.

C) amount which one more unit of output adds to total cost.

D) difference between price and average total cost at the profit-

maximizing level of output.



Output 0 1 2 3 4 5 6

Total Cost 1

0

2

0

2

8

3

8

5

3

7

3

98

(26) Refer to the above table. The total variable cost of producing 5 units is:A) k.d 10 B) k.d 14.6

C) k.d 63 D) k.d 73

(27) Refer to the above table. The average total cost of producing 3 units of

output is:

A) k.d 9.33 B) k.d 10

C) k.d 12.67 D) k.d 38

(28) Refer to the above table. The average fixed cost for producing 3 units of

output is:

A) k.d 3.33 B) k.d 10

C) k.d 12.67 D) k.d 38

(29) Refer to the above table. The marginal cost of producing the sixth unit

of output is:

A) k.d 10 B) k.d 16.33

C) k.d 25 D) k.d 98

(30) Refer to the above table. The average variable cost of producing the first

unit of output is:

A) k.d 10 B) k.d 20C) k.d 30 D) Information not sufficient

(31) If you know that total fixed cost is k.d 200, total variable cost is k.d 600,

and total product is 4 units, then:

A) marginal cost is k.d 50.

B) average fixed cost is k.d 100.

C) average total cost is k.d 100.

D) average variable cost is k.d 150.

(32) If average variable cost is k.d 74 and total fixed cost is k.d 100 at 5 units

of output, then average total cost at this output level is:A) k.d 91 B) k.d 94

C) k.d 97 D) k.d 100

(33) With fixed costs of k.d 400, a firm has average total costs of k.d 3 and

average variable costs of k.d 2.50, Its output is:

A) 200 units B) 400 units

C) 800 units D) 1600 units

(34) As output increases, average fixed cost:

A) increase.

B) decrease.C) remains constant.



D) first increase and then decrease.



(35) The short-run marginal-cost (MC) curve eventually rises because of:

A) diseconomies of scale.

B) increasing fixed costs.

C) diminishing marginal returns.

D) increasing marginal productivity of the variable inputs.

(36) If the short-run average variable cost of production for a firm is

decreasing, then it follows that:

A) average variable cost must be above average fixed cost.

B) marginal cost must be below average variable cost.

C) average fixed cost must be constant.

D) marginal cost must be decreasing.

(37) At which point of the graph is the MP the greatest?

A) point AB) point B

C) point C

D) point D

(38) If marginal cost is below average variable cost:

A) average total cost is increasing but average variable cost is

decreasing.

B) both average total cost and average variable cost are decreasing

C) both average total cost and average variable cost are increasing.

D) average variable cost is less than average fixed cost.

(39) If the short-run average variable costs of production for a firm are rising,

then this indicates that:

A) average total costs are at a maximum.

B) average fixed costs are constant.

C) marginal costs are above average variable costs.

D) average variable costs are below average fixed costs.

(40) The area represented by the rectangular (abcd) in the graph below equals

A) total cost for producing (ad)

B) variable cost for producing (ad)

C) average total cost for producing (ad)D) average variable cost for producing (ad)



**Answer the next three questions on the basis of the graph below :

(41) Variable cost when producing (hg) equals :

A) hfeg B) hbag

C) bacd D) hdcg

(42) Average variable cost when producing (hg) equals :

A) ge B) ac

C) gc D) ec

(43) The distance (ca) represents :

A) average total cost when producing (hg)

B) average variable cost when producing (hg)

C) average fixed cost when producing (hg)

D) none of the above

(44) If marginal cost exceeds average total cost in the short run, then which is

likely to be true?

A) Average total cost is increasing.

B) Average variable cost is decreasing.

C) Average total cost is less than average variable cost.D) Marginal cost is less than average variable cost.

(45) The firm's short-run marginal-cost curve is increasing when:

A) MP is increasing. B) MP is decreasing.

C) TFC is increasing. D) AFC is decreasing.

(46) When average variable cost is at a minimum:

A) marginal cost is at a maximum.

B) the average product of labor is at a minimum.

C) the marginal product of labor is at a minimum.

D) the average product of labor is at a maximum.



** Based on the graph below, answer the next three questions :

(47) Fixed costs are equal to :

A) k.d 75 B) k.d 120C) k.d 90 D) k.d 200

(48) Total cost for producing 200 units is :

A) k.d 260 B) k.d 250

C) k.d 200 D) k.d 290

(49) Average fixed cost for producing 450 units :

A) k.d 2 B) k.d 0.200

C) k.d 2.2 D) cannot be measured

(50) If long-run average total cost decreases as output increases, this is due to:

A) declining average fixed costs.

B) the law of diminishing returns.

C) economies of scale.

D) externalities .

(51) When a firm doubles its inputs and finds that its output has more than

doubled, this is known as:

A) economies of scale.

B) constant returns to scale.

C) diseconomies of scale.

D) a violation of the law of diminishing returns.



Problem sets :

(1) A factory has the following resources and the costs corseponding to its use :

land rental costs k.d 10 daily, labor costs k.d 7 daily . Complete the followingtable .

No. of

Labor (L)

Total product

(TP)

Marginal product

(MP)

Average product

(AP)

0 0

1 10 10

2 25

3 12

4 10

5 8

6 5

7 3

a) Find the marginal product for the second laborer .

b) What is the total product when the factory employs 4 workers ?

c) What is the total cost for producing 60 units ?

d) What is the marginal cost for producing the 25th unit ?

(2) Suppose that fixed cost = k.d 30 , and the production and costs table is as

follows :

Total product

(TP)

Variable cost

(VC)

1 7

2 13

3 18

4 24

5 31

6 39

7 48

a) Find the marginal cost of the 4th unit of production .

b) What is the average total cost for producing 6 units ?

c) Find the fixed cost for producing the 5th unit .

d) If marginal cost for both the 8th and 9th units equals k.d 12 per unit , what is the

total cost for producing 9 units ?



(3) Suppose you have the following data :

No. of Workers

(L)

Total product(TP)

Fixed cost(FC) – k.d

0 0 15

1 5

2 15

3 37.5

4 50

5 61

6 69

7 76

a) Calculate the marginal product of the 4th worker .

b) Calculate the total cost when producing 50 units , given that wages are k.d 20

per unit of labor .

c) What is the average fixed cost of employing 6 workers ?

(4) The following data represent the cost structure for a dairy products plant :

Quantity produce

d

Total cost(k.d)

0 20

1 28

2 35

3 41

4 48

5 56

6 65

7 75

a) Find the fixed cost of producing 5 units .

b) Find the variable cost of producing 6 units .

c) Calculate the average total cost at 4 units .

d) Calculate the marginal cost of the 6th unit .



(5) The following table represent levels of production at different levels of labor

given that the price of a unit of labor is k.d 25 .

Labor

units

Total product

(TP)

Capital cost

( k.d )

0 0 100

1 25

2 75

3 175

4 250

5 305

6 345

a) What is the average fixed cost of producing 305 units ?

b) What is the average variable cost of producing 175 units ?

c) At which unit of labor the average variable cost reaches a minimum ?

(6) Complete the following short-run cost table using the information provided.

Totalproduct TFC AFC TVC AVC TC MC

0 k.d____ ––– k.d____ ––– k.d____ k.d____

1 ____ k.d____ ____ k.d12 ____ ____

2 ____ 12 ____ 10 ____ ____

3 ____ ____ ____ 12 ____ ____

4 ____ ____ ____ 14 ________



(7) The table below shows the total production of a firm as the quantity of labor

employed increases. The quantities of all other resources employed are

constant. Compute the marginal and average products and enter them in the

table.

Marginal Average

Units Total product product

of Labor product of labor of labor

0 0 ––– –––

1 40 ______ ______

2 100 ______ ______

3 165 ______ ______

4 200 ______ ______

5 225 ______ ______

6 240 ______ ______ 7 245 ______ ______

8 240 ______ ______

a) At what levels are there increasing returns to labor and at what levels are

there decreasing returns to labor?

b) Describe the relationship between the total product and marginal product.

c) Describe the relationship between marginal and average product.

(8) Assume that a firm has a plant of fixed size and that it can vary its output

only by varying the amount of labor it employs. The table below shows the

relationships between the amount of labor employed, the output of the firm,

the marginal product of labor, and the average product of labor.

a) Assume each unit of labor costs the firm k.d20. Compute the total cost of

labor for each quantity of labor the firm might employ, and enter these

figures in the table.

b) Now determine the marginal cost of the firm’s product as the firm

increases its output. Enter these figures in the table.

c) If labor is the only variable input, the total labor cost and total variable

cost are equal. Find the average variable cost of the firm’s product. Enter

these figures in the table.

d) Describe the relationship between the marginal product of labor and the

marginal cost of the firm’s product.



e) Describe the relationship between the average product of labor and the

average variable cost.

Quantity Marginal Average Total Average

of labor Total product product variable Marginal variable

employed output of labor of labor cost cost cost

0 0 ––– ––– ––– –––

1 10 10 10.00 k.d_____ k.d_____ k.d_____

2 22 12 11.00 _____ _____ _____

3 36 14 12.00 _____ _____ _____

4 48 12 12.00 _____ _____ _____

5 58 10 11.60 _____ _____ _____

6 66 8 11.00 _____ _____ _____ 7 72 6 10.28 _____ _____ _____

8 76 4 9.50 _____ _____ _____

9 78 2 8.66 _____ _____ _____

10 78 0 7.80 _____ _____ _____

Essay Questions :

• Why is it important to distinguish between explicit and implicit costs?

• What is the relationship between total product, marginal product, and average product shown by the law of diminishing returns?

• What is the relationship between marginal cost and marginal product?

• What factors explain economies of scale?

• What is the difference between the short run and the long run?

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Part 05 Production & Costs