Overview
Chapter 11
Production and cost analysis i
1) Accounting profit and economic profit differ because economic profit does not take into account opportunity cost.
Answer: FALSE
Explanation: Accounting profit does not take into account opportunity cost.
Difficulty: 1 Easy
Topic: The Role of the Firm
Learning Objective: 11-01 Explain the role of the firm in economic analysis.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
2) In the long run all inputs are variable; in the short run some inputs are fixed.
Answer: TRUE
Explanation: This is the distinction between the short run and the long run.
Difficulty: 1 Easy
Topic: The Production Process
Learning Objective: 11-02 Describe the production process in the short run.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
3) The law of diminishing marginal productivity states that as more units of a variable input are added, holding other inputs constant (ceteris paribus), the additional output obtained from each new unit of the variable input eventually falls.
Answer: TRUE
Explanation: This is the way the text explains the law of diminishing marginal productivity.
Difficulty: 1 Easy
Topic: The Production Process
Learning Objective: 11-02 Describe the production process in the short run.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
4) The law of diminishing marginal productivity implies that identical increases in all inputs eventually will result in smaller incremental increases in total output.
Answer: FALSE
Explanation: The law of diminishing marginal productivity assumes that at least one input is fixed and cannot be increased. The definition in the question refers to diseconomies of scale.
Difficulty: 2 Medium
Topic: The Production Process
Learning Objective: 11-02 Describe the production process in the short run.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
5) Fixed costs remain the same regardless of the level of production.
Answer: TRUE
Explanation: Fixed costs are costs that do not change in the time under consideration.
Difficulty: 1 Easy
Topic: The Costs of Production
Learning Objective: 11-03 Calculate fixed costs, variable costs, marginal costs, total costs, average fixed costs, average variable costs, and average total costs.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
6) If average fixed cost is $2 and average variable cost is $3, total cost is $5.
Answer: FALSE
Explanation: Total cost equals the sum of variable and fixed costs, not the sum of average variable costs and average fixed costs.
Difficulty: 2 Medium
Topic: The Costs of Production
Learning Objective: 11-03 Calculate fixed costs, variable costs, marginal costs, total costs, average fixed costs, average variable costs, and average total costs.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
7) If total cost is 100, total fixed cost is 30, and output is 20, average variable cost is 3.5.
Answer: TRUE
Explanation: Variable cost is 70 in this case, and since average variable cost equals total variable cost divided by output, it must equal 3.5.
Difficulty: 2 Medium
Topic: The Costs of Production
Learning Objective: 11-03 Calculate fixed costs, variable costs, marginal costs, total costs, average fixed costs, average variable costs, and average total costs.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
8) The vertical distance between the average total cost and average variable cost curves falls as output rises.
Answer: TRUE
Explanation: Since average total cost equals the sum of average variable costs and average fixed costs and since average fixed cost falls as output rises, this statement is true.
Difficulty: 2 Medium
Topic: Graphing Cost Curves
Learning Objective: 11-04 Distinguish the various cost curves and describe the relationships among them.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
9) As output increases, average total cost always falls because average fixed cost declines.
Answer: FALSE
Explanation: Although average fixed cost declines as output rises, average variable cost increases with output after some point, and this increase eventually causes average total cost to increase.
Difficulty: 2 Medium
Topic: Graphing Cost Curves
Learning Objective: 11-04 Distinguish the various cost curves and describe the relationships among them.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
10) If the law of diminishing marginal productivity holds true, both average total cost and marginal cost must diminish as output increases.
Answer: FALSE
Explanation: When marginal product begins to fall, marginal cost begins to rise. Both the average total cost curve and the marginal cost curve are typically U-shaped. In particular, the law of diminishing marginal productivity refers to the part of the curves where both average total cost and marginal cost increase as output increases.
Difficulty: 2 Medium
Topic: Graphing Cost Curves
Learning Objective: 11-04 Distinguish the various cost curves and describe the relationships among them.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
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