Principles of Economics: Costs of Production

Costs of Production

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1. Fixed costs: a. vary with the quantity of goods produced.
b. include the costs of labor and materials.
c. are computed by dividing total costs by the quantity produced.
d. must be paid even if nothing is produced.
e. none of the above.

2. The total fixed cost curve: a. is vertical.
b. increases.
c. decreases.
d. is horizontal.
e. none of the above.

3. Which of the following is considered to be a fixed cost of operating an automobile?: a. gasoline
b. tires
c. oil change
d. maintenance
e. registration fees

4. Total costs: a. are the sum of fixed and marginal costs.
b. are the sum of average variable costs and average fixed costs.
c. equal marginal cost times the number of units.
d. all of the above.
e. none of the above.

5. Average total costs: a. is the sum of average fixed and average variable costs.
b. is the change in total costs generated from the change in quantity produced.
c. has a graph that is always upward sloping.
d. all of the above.
e. none of the above.

6. The law of diminishing returns: a. requires one input to be fixed.
b. is the result of the declining productivity of variable inputs.
c. makes the average variable cost curve eventually slope upward.
d. all of the above.
e. none of the above.

7. Marginal cost is: a. the cost of producing goods we cannot sell.
b. the additional cost incurred by adding one more unit of output to production.
c. always less than average total cost.
d. always greater than average variable costs.

8. The marginal cost curve: a. decreases initially.
b. eventually is upward sloping.
c. is less than average total cost when the ATC curve is downward sloping.
d. all of the above.
e. none of the above.

9. Average variable costs: a. are always greater than average fixed costs.
b. equal total variable costs divided by the number of units.
c. are always downward sloping.
d. all of the above.
e. a and b.

10. Which of the following cost curves always declines as output increases?: a. Average Total Costs
b. Average Variable Costs
c. Average Fixed Costs
d. Marginal Costs
e. Total Costs

11. The Marginal Cost Curve passes through the minimum of the Average Total Cost Curve because: a. both are "U" shaped.
b. up to that point, each additional unit adds less than the average and afterwards, each additional unit adds more than the average.
c. at low levels of output, marginal costs are less than total costs.
d. fixed costs are always decreasing.

12. In the long run,: a. average total costs are always more than average variable costs.
b. all inputs are variable.
c. fixed costs are increasing.
d. variable costs are zero.

13. The long run average total cost curve: a. passes through the minimum of the short run average total cost curve.
b. is calculated by keeping all inputs fixed.
c. is the envelope curve enclosing the short run average total cost curves.
d. is calculated by dividing fixed costs by the level of output.

14. The following figure represents: a. constant returns to scale.
b. economies of scale.
c. diseconomies of scale.
d. We do not have enough information to say.

15. The following figure represents: a. constant returns to scale.
b. economies of scale.
c. diseconomies of scale.
d. We do not have enough information to say.

16. Andrew McGuire is named as the new CEO of a major automobile company. Within a week he announces: "We must downsize by closing two plants if we want to be competitive for the long term." What is Mr. McGuire implying?: a. Fixed costs at the firm are too high.
b. There is too much competition in the industry.
c. The firm is on the upward sloping portion of the long run average total cost curve.
d. The firm is experiencing economies of scale.