Tutorial 6 Solutions - CHAPTER 13 (The Costs of Production) PDF

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CHAPTER 13 (The Costs of Production)...

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TUTORIAL – Solutions CHAPTER 13 (The Costs of Production)

1. Mosti, a materials engineer, has discovered a groundbreaking new way to make recycled plastic stronger. He is looking to exploit this discovery by starting up his own business at a cost of $500 000. Unfortunately Mosti has only $200 000 in savings and must borrow the other $300 000. If the interest rate is 10%, then what, according to an economist, is the opportunity cost of starting up the business? A. $500,000 per annum B. $50,000 per annum C. $30,000 per annum D. $20,000 per annum ANS: B

TOPIC:

Economic profit versus accounting profit

Graph 13-1

This graph depicts a production function for a firm that produces cookies. Use the graph to answer the following question(s). 2. Refer to Graph 13-1. As the number of workers increases: A. total output increases, but at a decreasing rate B. marginal product increases but at a decreasing rate C. marginal product increases D. total output decreases ANS: A curve !

TOPIC:

From the production function to the total-cost

3.Refer to Graph 13-1. With regard to cookie production, the figure implies: A. decreasing cost of cookie production B. diminishing marginal product of workers C. increasing marginal product of workers D. diminishing marginal cost of cookie production ANS: B curve !

TOPIC:

From the production function to the total-cost

Graph 13-2

This graph depicts a total cost function for a firm that produces cookies. Use the graph to answer the following question(s).

4. Refer to Graph 13-2. Which of the statements below is most consistent with the shape of the total cost curve? A. producing additional cookies is equally costly, regardless of how many cookies are already being produced B. producing additional cookies becomes increasingly costly only when the number of cookies already being produced is large C. producing an additional cookie is always more costly than producing the previous cookie D. total production of cookies decreases with additional units of input ANS: C curve

TOPIC:

From the production function to the total-cost

5. Refer to Graph 13-2. Identify the true statements from the list below. (i) the marginal cost of cookie production is increasing

(ii) cookie production exhibits diminishing marginal product (iii) the slope of the production function increases as quantity of inputs increase A. (i) only B. (ii) and (iii) C. (i) and (iii) D. (i), (ii) and (iii) ANS: D

TOPIC:

The production function!

6. Refer to Graph 13-2. The changing slope of the total cost curve reflects: A. decreasing average cost B. increasing marginal product C. decreasing marginal product D. increasing fixed cost ANS: C

TOPIC:

The production function !

! Graph 13-6

This graph depicts average total cost functions for a firm that produces automobiles. Use the graph to answer the following question(s). 7. Refer to Graph 13-6. Which of the curves is most likely to characterise the short-run average total cost curve of the biggest factory? A. ATCA B. ATCB C. ATCC D. ATCD ANS: C average total cost

TOPIC:

The relationship between short-run and long-run

8. Refer to Graph 13-6. Which curve represents the long-run average total cost? A. ATCA B. ATCB C. ATCC D. ATCD ANS: D average total cost

TOPIC:

The relationship between short-run and long-run

For the following questions, provide a short answer: 9.

Consider the following graph of a firm in the short-run.

Identify the average fixed cost curve, the marginal cost curve, the average variable cost curve and the average total cost curve. ANS: The average fixed cost curve is D The marginal cost curve is A The average variable cost curve is C The average total cost curve is B. TOPIC:

Cost curves and their shapes

10. If the long-run average total cost curve is flat, then what does this imply about specialisation? What will be the firm’s efficient scale? ANS: If the long-run average total cost curve is flat then this implies that there are no returns to specialisation. As a result, the firm can produce efficiently at any output level.

TOPIC:

Economies and diseconomies of scale

11. If the average total cost curve is falling, what is necessarily true of the marginal cost curve? If the average total cost curve is rising, what is necessarily true of the marginal cost curve? ANS: When the average total cost curve is falling, it is necessarily above the marginal cost curve. If the average total cost curve is rising, it is necessarily below the marginal cost curve. TOPIC:

The relationship between marginal cost and average total cost

ADDITIONAL PRACTICE QUESTIONS Note: For the following questions, correct answers are provided at the end of this section. If you provide an incorrect answer, you have to truly understand why your answer is incorrect and why the provided one is correct. Otherwise, no learning takes place. Keep in mind that simply memorizing answers will not help pass the exams.

True or False Questions. 1. Accounting profit and economic profit are two ways to say the same thing. 2.

The cost of capital includes both any interest payments in loans as well as any forgone interest on savings used to finance the business.

3. The short run is defined as the period of time in which all factors of production are fixed. 4. The shape of the total cost curve is unrelated to the shape of the production function. 5. The cost of producing an additional unit of a good is not the same as the average cost of the good. 6. The marginal cost curve bisects the average total cost curve at the minimum point of the average total cost curve. 7. Because of the greater flexibility that firms have in the long run, all short-run cost curves lie on or above the long-run curve. 8. The time it takes for a firm to reach the long run depends on the firm and the products it makes.

Multiple Choice questions

9.

An important implicit cost of almost every business is the: A. cost of accounting services B. cost of compliance with government regulation C. opportunity cost of financial capital that has been invested in the business D. cost of debt

10. During the summer Jeremy, a small business owner, can hire extra staff to help him repair boats. On his own Jeremy can repair 10 boats a day, adding a second staff member sees 15 boats a day repaired, and adding a third sees 18 boats a day repaired. The marginal product of the third worker is:

A. B. C. D.

18 boats/day 15 boats/day 5 boats/day 3 boats/day

11. Fixed costs can be defined as costs that: A. are incurred only when production is large enough B. are unaffected by production C. vary inversely with production D. vary at a fixed rate with production

Graph 13-4

NARREND 12. Refer to Graph 13-4. Which of the following can be inferred from the figure shown? (i) marginal costs vary for different levels of output (ii) diminishing marginal product does not occur directly after the first worker (iii) marginal product of the second worker exceeds that of the first A. (i) and (ii) B. (ii) and (iii) C. (i) and (iii) D. (i), (ii) and (iii) Graph 13-5

The set of curves above reflect information about the cost structure of a firm. Use this graph to answer the following question(s). 13. Refer to Graph 13-5. This particular firm is necessarily experiencing increasing marginal product when curve: A. A is falling B. B is falling C. C is falling D. D is falling 14. Refer to Graph 13-5. Curve A is necessarily U-shaped because of: A. diminishing marginal product B. increasing marginal product C. the fact that decreasing marginal product follows increasing marginal product D. the fact that increasing marginal product follows decreasing marginal product 15. Refer to Graph 13-5. This particular firm is necessarily experiencing diminishing marginal product when which of the following is occurring? (i) line A is rising (ii) line B is rising (iii) line C is rising A. (i) only B. (iii) only C. (i) and (ii) D. (i), (ii) and (iii)

Answers Answers to True/False and Multiple Choice Questions

1. ANS: F

TOPIC:

Costs as opportunity costs

2. ANS: T

TOPIC:

The cost of capital as an opportunity cost

3. ANS: F

TOPIC:

How long is the long run?

4. ANS: F

TOPIC:

From the production function to the total-cost curve

5. ANS: T

TOPIC:

Average and marginal cost

6. ANS: T

TOPIC:

The relationship between marginal cost and average total cost

7. ANS: T cost

TOPIC:

The relationship between short-run and long-run average total

8. ANS: T cost

TOPIC:

The relationship between short-run and long-run average total

9. ANS: C

TOPIC:

Costs as opportunity costs

10. ANS: D

TOPIC:

The production function

11. ANS: B

TOPIC:

Fixed and variable costs

12. ANS: D

TOPIC:

The various measures of cost

13. ANS: A

TOPIC:

Cost curves and their shapes !

14. ANS: C

TOPIC:

U-shaped average total cost

15. ANS: D

TOPIC:

Cost curves and their shapes...