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1 Version A Name Date Unit 4 Practice all at once 1. Refer to the following table about the production function for Terry's Widget Shoppe to answer questions 1-4. Assume labor is the only variable input Terry uses in the production of widgets. The marginal product of labor from hiring the third worker is 450 widgets per worker. 200 widgets per worker. 150 widgets per worker. 250 widgets per worker. 2. Diminishing returns to labor begins when Terry hires the second worker. third worker. fourth worker. fifth worker. 1 of 17 11/2/16, 1:29 PM

2 3. Terry spends $200 a month to rent a building for his company, $600 a month for the capital he employs to produce widgets, and $10 per hour for every worker he employs. Terry's fixed cost per month is $200. $600. $800. $ Terry spends $200 a month to rent a building for his company, $600 a month for the capital he employs to produce widgets, and $10 per hour for every unit of labor he employs. deciding whether or not he is producing in the short run or the long run. whether or not the cost varies as his level of production changes. whether or not the cost exceeds $500. recognizing that capital is always a fixed cost while rent and labor are variable costs. 5. Use the information below to answer the next four questions. The table provides production function information for Jimmy's Service Shop. Assume Jimmy hires only labor and capital to produce his services. The price of labor is $100 per worker per week, and the price of capital is $10 per unit. Jimmy's fixed cost of production equals $0. $100. $110. $ Jimmy's variable cost of production 2 of 17 11/2/16, 1:29 PM

3 is constant and equal to $100 given the above information. varies with the level of output that is produced. is always greater than his fixed cost decreases as the level of production increases due to diminishing marginal returns. 7. Jimmy's total cost of producing 700 units of output is equal to the sum of his fixed and variable costs of producing this level of output. $500. greater than his total cost of producing 600 units of output. Answers (A), (B), and (C) are all true. 8. Jimmy's marginal cost of producing the seven-hundredth unit of output is equal to 3 of 17 11/2/16, 1:29 PM

4 $500 per unit of output. $400 per unit of output. $100 per unit of output. $1 per unit of output. 9. The marginal cost curve is upward sloping as output increases due to increasing returns to scale. decreasing returns to scale. diminishing marginal returns to the variable input. increasing marginal returns to the variable input. 10. In recent years there has been an increased demand for organic produce due to concerns about health issues related to food consumption. Holding everything else constant, in the short run this demand should lead to, while in the long run. increases in the price of organic produce; entry of firms into the industry will reduce the price of organic produce increases in the price of organic produce; exit of firms from the industry will further increase the price of organic produce decreases in the price of organic produce; entry of firms into the industry will further reduce the price of organic produce decreases in the price of organic produce; exit of firms from the industry will increase the price of organic produce 11. Which of the following describes a perfectly competitive industry? Elementary school students are only allowed to attend only the school in their attendance area Water for household use is sold by the local water utility. The price of wine is determined by global supply and demand. A small share of the total world production of wine is produced in a local valley by ten companies. The price of oil is determined by global supply and demand. A total of five companies produce the world's supply of oil. 4 of 17 11/2/16, 1:29 PM

5 12. Marginal revenue is the addition to total revenue from producing one more unit of the good. cost from selling one more unit of the good. revenue from selling one more unit of the good. profit from producing and selling one more unit of the good. 13. Suppose Jerry calculates that if he produces one more box of pens, his total cost will increase by $15, but that he can sell this box of pens for $14.Jerry will produce the pens and increase his revenues. not produce the pens, since the revenue from the additional pens is less than the cost of producing the additional pens. produce the pens, but wait to sell them until the market price of pens increases shut down his pen production because his addition to revenue from pen production is less than his addition to cost from pen production. 14. The optimal output rule for a perfectly competitive firm is to produce that quantity at which MR = MC in the long run, but in the short run, to produce that quantity at which MC = ATC. MC = ATC in the short run. MR = MC no matter what the time period, provided that marginal revenue is greater than average variable cost. MR = MC no matter what the time period, provided that marginal revenue is greater than average total cost. 15. Which of the following statements about a perfectly competitive firm is true? I. A firm profit maximizes by producing that output where MR = MC. II. A firm will produce in the short run provided that the price of the good exceeds its average variable cost. III. A firm in the long run can make positive economic profits. Statement I Statements I and II Statements I and III Statements I, II, and III 16. When a perfectly competitive firm earns zero economic profit in the long run, this implies that accounting profits are also zero. are positive. are negative. may be positive, negative, or zero. 5 of 17 11/2/16, 1:29 PM

6 17. A firm calculates that the cost of producing its tenth unit of output is $0.50, while the revenue from producing this tenth unit is $0.55. This firm should definitely produce the tenth unit. should definitely stop producing because it knows it is profit maximizing and may risk reducing its profit if it produces any more units of the good. should definitely produce at least five more units if it hopes to profit maximize. cannot increase its production in the short run because its fixed inputs are constant. 18. The implicit cost of capital is: the expense associated with leasing machines. the expense associated with buying machines. the opportunity cost of capital used by a business. irrelevant for determining economic profit. the interest rate paid to the bank on loans. 19. Suppose the Chicago Cubs could rent out Wrigley Field (the field the players play on) to local youth leagues for $11,000 per month. The $11,000 per month reflects the of capital. implicit cost explicit cost direct cost total cost average fixed cost 20. For most firms, economic profit is: less than accounting profit. equal to accounting profit. greater than accounting profit. negative in the short run. positive in the short run but negative in the long run. 21. Economic profits are calculated by: taking the difference between total revenue and the sum of explicit and implicit costs. taking the difference between total revenue and explicit costs only. taking the difference between the total revenue and implicit costs only. 6 of 17 11/2/16, 1:29 PM

7 summing total revenue, explicit and implicit costs. summing the explicit and the implicit costs. 22. Rodger is deciding how many football games he wants to attend this year. The total benefit that Rodger receives from football games is shown in the table. Rodger's marginal benefit from increasing the number of games that he attends from two to three is: Rodger is deciding how many football games he wants to attend this year. The total benefit that Rodger receives from football games is shown in the table. If tickets to each football game cost $10, then he should attend game(s) of 17 11/2/16, 1:29 PM

8 6 24. Rodger is deciding how many football games he wants to attend this year. The total benefit that Rodger receives from football games is shown in the table. If tickets to each football game cost $75, he should attend game(s) Rodger is deciding how many football games he wants to attend this year. The total benefit that Rodger receives from football games is shown in the table. If the games are free, he should attend game(s) of 17 11/2/16, 1:29 PM

9 26. Referring to the table, the marginal product of the fifth worker is: The idea of diminishing returns to an input in production suggests that if a local college adds more and more custodians, the marginal product of labor for the custodial staff will over time. increase at an increasing rate increase at a decreasing rate decrease not change increase at a constant rate. 28. You own a small deli that produces sandwiches, soups, and other items for customers in your town. Which of the following is a fixed input in the production function at your deli? the dining room where customers eat their meals loaves of bread used to make sandwiches cans of tomato sauce used to make soups employees hired to help make the food electricity to power the lights and appliances. 29. A planning period during which all of a firm's resources are variable is the: long run. fixed run. short run. nominal run. production run. 9 of 17 11/2/16, 1:29 PM

10 30. Assuming that all other factors of production are held constant, marginal product is the change in output resulting from a one-unit change in. total; a variable input total; a fixed input total; average product per unit; a fixed input total; consumption 31. The costs associated with variable inputs are costs and the costs associated with inputs are costs. constant; fixed; fixed fixed; fixed; variable variable; fixed; variable fixed; fixed; fixed variable; fixed; fixed 32. Which of the following cost concepts is correctly defined? a b c d e 33. A cost that does not change with the level of output produced is called a: marginal cost. fixed cost. variable cost. average total cost. average fixed cost. 34. When a cherry orchard in Oregon adds an additional worker, the total cost of production increases by $24,000. Adding the worker increases total cherry output by 600 pounds. Therefore, the marginal cost of the last pound of cherries produced is: 10 of 17 11/2/16, 1:29 PM

11 $40. $19. $4,000. $24,000. $ If Marie s Marionettes is operating under conditions of diminishing marginal product, the marginal costs will be: equal to ATC. decreasing. increasing. constant. equal to zero. 36. The marginal cost curve is the mirror image of the: total product curve. average product curve. marginal product curve. average total cost curve. marginal utility curve. 37. When marginal cost is rising: average variable cost must be rising. average total cost must be rising average variable cost and average total cost must be falling. both average variable cost and average total cost may be rising or falling. marginal product is rising. 38. The curve continually declines as more output is produced in the short run. marginal cost average variable cost average fixed cost average total cost total variable cost 39. A fixed cost: 11 of 17 11/2/16, 1:29 PM

12 will exist only in the long run. depends on the level of output. will be positive, even if the firm doesn't produce any output in the short run. decreases after the point of diminishing returns is reached. exists in both the short and the long run. 40. The long run refers to the period of time for which: a fixed input exists. all inputs are variable. marginal costs are decreasing. diminishing returns causes marginal cost to increase marginal product is increasing. 41. Total cost divided by the quantity of output produced is: average total cost. average fixed cost. average product. marginal cost. average profit. 42. The marginal cost curve intersects the average variable cost curve at: its lowest point. its maximum. its endpoint. no point; the curves don't intersect. all points; the curves are the same. 43. If a firm produces 10 units of output and incurs $30 in average variable cost and $5 in average fixed cost, total cost is: $35. $50. $300. $350. $ When marginal cost is above average variable cost, average variable cost must be: 12 of 17 11/2/16, 1:29 PM

13 at its minimum. at its maximum falling. equal to zero. rising. 45. The sum of fixed and variable costs is: total cost. marginal cost. variable cost. average cost. average variable cost. 46. The long-run average total cost curve is tangent to an infinite number of: short-run total cost curves. short-run marginal cost curves. short-run total cost curves. b. short-run marginal cost curves. c. short-run average variable cost curves. short-run average total cost curves. short-run total cost curves. b. short-run marginal cost curves. c. short-run average variable cost curves. d. short-run average total cost curves. e. short-run marginal product curves. 47. A university that benefits from lower costs per unit as it grows is an example of: economies of scale. diseconomies of scale. increasing opportunity costs. scale reduction. sunk costs For large beer breweries, it is common for long-run average total cost to decline as output increases. This indicates that many breweries achieve: diseconomies of scale. diminishing marginal returns. economies of scale. constant returns to scale. fixed cost minimization. 49. The U-shape of the long-run average total cost curve is primarily due to: 13 of 17 11/2/16, 1:29 PM

14 technological change. economies and diseconomies of scale. increasing and then diminishing marginal returns. sunk costs. inefficient management at all levels of output. 50. The slope of a long-run average total cost curve exhibiting decreasing returns to scale is: zero. infinite. positive. negative. downward sloping. 51. One characteristic of a perfectly competitive market is that there are sellers of the good or service. one or two a few usually less than 10 hundreds or thousands of zero 52. a local California avocado stand operates in a perfectly competitive market, that stand owner will be a: price-maker. price-taker. price-discriminator. price-maximizer. cost-maximizer. 53. A monopoly is a market structure characterized by: a single buyer and several sellers. a product with many close substitutes. a large number of small firms. price-taking behavior. barriers to entry and exit. 54. Most electric, gas, and water companies are examples of: 14 of 17 11/2/16, 1:29 PM

15 unregulated monopolies. natural monopolies. restricted-input monopolies. sunk-cost monopolies. private monopolies. 55. An oligopoly is characterized as an industry in which: there are many firms, each producing an identical product. there are many firms, each producing a similar product. all market participants are price-takers. only one firm produces a very differentiated product. there are few firms, each producing a differentiated or similar product. 15 of 17 11/2/16, 1:29 PM

16 Version A Answer Sheet Unit 4 Practice all at once widgets per worker. 2. fourth worker. 3. $ whether or not the cost varies as his level of production changes. 5. $ varies with the level of output that is produced. 7. Answers (A), (B), and (C) are all true. 8. $1 per unit of output. 9. diminishing marginal returns to the variable input. 10. increases in the price of organic produce; entry of firms into the industry will reduce the price of organic produce 11. The price of wine is determined by global supply and demand. A small share of the total world production of wine is produced in a local valley by ten companies. 12. revenue from selling one more unit of the good. 13. not produce the pens, since the revenue from the additional pens is less than the cost of producing the additional pens. 14. MR = MC no matter what the time period, provided that marginal revenue is greater than average variable cost. 15. Statements I and II 16. are positive. 17. should definitely produce the tenth unit. 18. the opportunity cost of capital used by a business. 19. implicit cost 20. less than accounting profit. 21. taking the difference between total revenue and the sum of explicit and implicit costs decrease 28. the dining room where customers eat their meals 16 of 17 11/2/16, 1:29 PM

17 29. long run. 30. total; a variable input 31. variable; fixed; fixed 32. c 33. fixed cost. 34. $ increasing. 36. marginal product curve. 37. both average variable cost and average total cost may be rising or falling. 38. average fixed cost 39. will be positive, even if the firm doesn't produce any output in the short run. 40. all inputs are variable. 41. average total cost. 42. its lowest point. 43. $ rising. 45. total cost. 46. short-run average total cost curves. 47. economies of scale. 48. economies of scale. 49. economies and diseconomies of scale. 50. positive. 51. hundreds or thousands of 52. price-taker. 53. barriers to entry and exit. 54. natural monopolies. 55. there are few firms, each producing a differentiated or similar product. 17 of 17 11/2/16, 1:29 PM

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