Download Ch07 Cost-Industry Structure Multiple Choice Questions 1. In

Ch07 Cost-Industry Structure
Multiple Choice Questions
1. In economics, a firm that faces no competitors is referred to as _________________.
A. an oligopoly
B. a monopoly
C. a perfect competitor
D. an oligopolizor
Answer: B Reference:
Explanation:
2. ________________________ arises where many firms are competing in a market to sell similar but
differentiated products.
A. Oligopolistic competition
B. Perfect competition
C. Monopolistic competition
D. Monogopolised competition
Answer: C Reference:
Explanation:
3. A firm's ___________ consist of expenditures that must be made before production starts that
typically, over the short run, _______________ regardless of the level of production.
A. fixed costs; do not change,
B. variable costs; are constantly changing,
C. fixed costs; are consistently changing,
D. variable costs; do not change,
Answer: A Reference:
Explanation:
4. ______________ include all of the costs of production that increase with the quantity produced.
A. Fixed costs
B. Variable costs
C. Average costs
D. Average variable costs
Answer: B Reference:
Explanation:
5. ____________________________ occur when the marginal gain in output diminishes as each
additional unit of input is added.
A. Diminishing variable returns
B. Diminishing average returns
C. Diminishing marginal returns
D. Diminishing marginal costs
Answer: C Reference:
Explanation:
6. In order to determine ____________, the firm's total costs must be divided by the quantity of its
output.
A. diminishing marginal returns
B. fixed costs
C. variable cost
D. average cost
Answer: D Reference:
Explanation:
7. In order to determine the average variable cost, the firm's variable costs are divided by
_______________________.
A. its' fixed costs
B. the quantity of output
C. its' average costs
D. diminishing marginal costs
Answer: B Reference:
Explanation:
8. The term _____________ is used to describe the additional cost of producing one more unit.
A. average cost
B. fixed cost
C. variable cost
D. marginal cost
Answer: D Reference:
Explanation:
9. In order to reduce the harmful affects of recession and carbon emissions, the government
provided tax incentives for manufacturing firm's to ___________________ that provide alternative,
more efficient methods of combining inputs to produce output.
A. acquire energy efficient production technologies
B. increase the returns to scale
C. maintain constant returns to scale
D. create perfect competition between firms
Answer: A Reference:
Explanation:
10. The term __________________ describes a situation where the quantity of output rises, but the
average cost of production falls.
A. diminishing marginal returns
B. marginal cost output
C. economies of scale
D. diseconomies of scale
Answer: C Reference:
Explanation:
11. In microeconomics, the term _____________________ is synonymous with economies of scale.
A. diminishing marginal returns
B. increasing returns to scale
C. decreasing returns to scale
D. constant returns to scale
Answer: B Reference:
Explanation:
12. The term "constant returns to scale" describes a situation where
A. expanding all inputs does not change the average cost of production.
B. a larger-scale firm can produce at a lower cost than a smaller-scale firm.
C. expanding all inputs changes the average cost of production.
D. the quantity of output rises and the average cost of production falls.
Answer: A Reference:
Explanation:
13. In microeconomics, the term ___________________ is synonymous with decreasing returns of
scale.
A. monopoly
B. economies of scale
C. diminishing returns
D. diseconomies of scale
Answer: D Reference:
Explanation:
14. If a firm is experiencing _____________________, then as the quantity of output rises, the average
cost of production rises.
A. decreasing returns to scale
B. consent returns to scale
C. economies of scale
D. increasing returns to scale
Answer: A Reference:
Explanation:
15. In the US economy, nearly half of all the workers employed by private firms work at
A. 18,000 firms with fewer than 100 employees.
B. 18,000 large firms that employ more than 500 workers.
C. 26,000 firms with fewer than 100 employees.
D. 26,000 large firms that employ more than 300 workers.
Answer: B Reference:
Explanation:
16. _____________ is calculated by taking the quantity of everything that is sold and multiplying it
by the sale price.
A. Total revenue
B. Total profits
C. Average profit margin
D. Total cost
Answer: A Reference:
Explanation:
17. ___________ include all spending on labor, machinery, tools, and supplies purchased from other
firms.
A. Total profits
B. Total revenues
C. Total costs
D. Total profit margins
Answer: C Reference:
Explanation:
18. Approximately what percentage of the US labor force is employed by firms that have fewer
than 100 employees?
A. 63%
B. 50%
C. 45%
D. 35%
Answer: D Reference:
Explanation:
19. According to the definition of profit, if a profit-maximizing firm will always attempt to
produce its desired level of output at the lowest possible cost, then it will
A. do so regardless of what type of competition exists in a market.
B. take a long-run perspective on costs, when such costs cannot be adjusted.
C. take a short-run perspective on labor costs which cannot be immediately changed.
D. breakdown its cost structure according to short-run adjustments.
Answer: A Reference:
Explanation:
20. The ______________ of all firms can be broken down into some common underlying patterns.
A. total revenues
B. diminishing short-run costs
C. cost structure
D. diminishing long-run costs
Answer: C Reference:
Explanation:
21. If a solar panel manufacturer wants to look at its total costs of production in the short run,
which of the following would provide a useful starting point?
A. divide total costs into two categories: variable costs that can't be changed in the short run and
fixed costs that can be
B. divide the total costs of production by the quantity of output
C. divide the variable costs of production by the quantity of output
D. divide total costs into two categories: fixed costs that can’t be changed in the short run and
variable costs that can be
Answer: D Reference:
Explanation:
22. Which of the following falls outside of the classification of business expenses that fall into the
category of fixed costs?
A. costs that must be made before production starts
B. costs that vary according to specific line of business
C. costs incurred in the act of producing
D. costs incurred as advertising expenses
Answer: C Reference:
Explanation:
23. Which of the following falls outside of the classification of business expenditures that fall into
the category of variable costs?
A. costs that increase with the quantity produced
B. costs of research and development
C. costs related to labor expenditures
D. costs related to physical inputs
Answer: B Reference:
Explanation:
24. Marcella operates a small, but very successful art gallery. All but one of the following can be
classified as a variable cost arising from the physical inputs Marcella requires to operate her
business. Which is it?
A. physical space for the gallery
B. costs of purchasing art work to sell in the gallery
C. wages paid to three part-time employees
D. accountant's fees for preparing tax returns
Answer: A Reference:
Explanation:
25. Why would labor be treated as a variable cost?
A. they are costs incurred in the act of producing that will decrease with quantity produced
B. they are made before production starts and vary according to the specific line of business
C. labor costs are an input cost that firms are unable to change in the short run
D. producing larger quantities of a good or service generally requires more workers
Answer: D Reference:
Explanation:
26. The graph above illustrates the total cost function for GoodieCookie Co. The changing slope
of the total cost curve reflects this company's
A. decreasing average total costs.
B. decreasing marginal costs.
C. decreasing average variable costs.
D. decreasing fixed costs.
Answer: B Reference:
Explanation:
27. The graph above illustrates the total cost function for GoodieCookie Co. How are the
company's fixed costs represented in this graph?
A. by adding up the fixed costs
B. at any vertical axis point where the total cost curve never equals zero
C. as the point where the total cost curve touches the vertical axis
D. by adding up the variable costs
Answer: C Reference:
Explanation:
28. If a paper mill shuts down its operations for three months so that it produces nothing, its
__________________ will be reduced to zero?
A. variable costs
B. fixed costs
C. opportunity costs
D. total cost
Answer: A Reference:
Explanation:
29. The table below sets out cost information for the production of volley balls. Some values are
missing. Which of the following statements is correct?
Quantity
Variable
Cost
Fixed Cost
Total Cost
0
1
2
3
0
12
25
A
30
30
B
C
72
A. A = 42; E = 40
B. A = 70; E = 40
C. A = 42, E = 12
D. A = 70; E = 12
Answer: C Reference:
Explanation:
Category: Apply
Average
Variable
Cost ($ per
unit)
0
12
D
14
Marginal
Cost ($ per
unit)
E
F
G
30. Mindy's company manufactures rubber balls used by elementary schools for playground
activities. The table below sets out her firm's production cost information. Some values are
missing. Which of the following statements is correct?
Quantity
Variable
Cost
Fixed Cost
Total Cost
0
1
2
3
0
5
15
A
40
40
B
C
60
Average
Variable
Cost ($ per
unit)
0
5
D
20
Marginal
Cost ($ per
unit)
E
F
G
A. A = 20; E = 45
B. A = 25; E = 45
C. A = 25; E = 5
D. A = 20; E = 5
Answer: D Reference:
Explanation:
Category: Apply
31. Refer to the table below.
Quantity
Cost
(in
dollars)
0
1
2
3
4
5
6
0
1
35
60
90
125
160
Fixed
Costs
(in
dollars)
40
40
40
40
40
40
40
Total
Costs
(in
dollars)
40
55
75
100
130
155
200
Average
Total Costs
(in dollars
per unit)
-15
17.5
20
22.5
25
26.6
Average Variable
Costs (in dollars per
unit)
-55
37.5
33.3
32.5
31
33.3
If this information were used to create a total cost graph, the curve should
A. begin at 40 on the vertical axis and slope upward.
B. become steeper as quantity increases.
C. become steeper due to diminishing returns.
D. reflect all of the above.
Answer: D Reference:
Explanation:
Marginal
Costs
(in dollars
per unit)
-15
20
25
30
35
40
32. Refer to the table below.
Quantity
Cost
(in
dollars)
0
1
2
3
4
5
6
0
1
35
60
90
125
160
Fixed
Costs
(in
dollars)
40
40
40
40
40
40
40
Total
Costs
(in
dollars)
40
55
75
100
130
155
200
Average
Total Costs
(in dollars
per unit)
-15
17.5
20
22.5
25
26.6
Average Variable
Costs (in dollars per
unit)
-55
37.5
33.3
32.5
31
33.3
Marginal
Costs
(in dollars
per unit)
-15
20
25
30
35
40
If the firm produces 5 units that it sells at a price of $30.00 each, what will its profits or losses
equal?
A. losses equal $5
B. profits equal $5
C. profits equal $25
D. losses equal $25
Answer: A Reference:
Explanation:
Category: Apply
33. Refer to the table below.
Quantity
Cost
(in
dollars)
0
1
2
3
4
5
6
0
1
35
60
90
125
160
Fixed
Costs
(in
dollars)
40
40
40
40
40
40
40
Total
Costs
(in
dollars)
40
55
75
100
130
155
200
Average
Total Costs
(in dollars
per unit)
-15
17.5
20
22.5
25
26.6
Average Variable
Costs (in dollars per
unit)
-55
37.5
33.3
32.5
31
33.3
Marginal
Costs
(in dollars
per unit)
-15
20
25
30
35
40
If the firm produces 5 units that it sells for $39.00 each, what will its profits or losses equal?
A. losses equal $40
B. profits equal $70
C. profits equal $40
D. losses equal $70
Answer: C Reference:
Explanation:
Category: Apply
34. Refer to the table below.
Quantity
Cost
(in
dollars)
0
1
2
3
4
5
6
0
1
35
60
90
125
160
Fixed
Costs
(in
dollars)
40
40
40
40
40
40
40
Total
Costs
(in
dollars)
40
55
75
100
130
155
200
Average
Total Costs
(in dollars
per unit)
-15
17.5
20
22.5
25
26.6
Average Variable
Costs (in dollars per
unit)
-55
37.5
33.3
32.5
31
33.3
Marginal
Costs
(in dollars
per unit)
-15
20
25
30
35
40
If the firm sells 5 units at a price of $30 each, then the marginal unit produced
A. costs more than the average cost.
B. is subtracting from profits.
C. costs the same as the average cost.
D. is adding to profits.
Answer: B Reference:
Explanation:
Category: Apply
35. I’MABigCorp. produces and sells kitchen wares. Last year, it produced 7,000 can openers and
sold each one for $6. To produce the 7,000 can openers, the company incurred variable costs of
$28,000 and a total cost of $45,000. I'MABIGCorp.'s average fixed cost to produce the 7,000 can
openers was
A. $1.50
B. $1.23
C. $2.25
D. $2.43
Answer: D Reference:
Explanation:
Category: Apply
36. I'MaPizzaCo. produces and sells specialty pizzas. Last year, it produced 8,000 mushroom,
sausage and spinach pizzas and sold each one for $8. To produce these 8,000 specialty pizzas, the
company incurred variable costs of $24,000 and a total cost of $40,000. I'MaPizzaCo's average
fixed cost to produce 8,000 specialty pizzas was
A. $3.00
B. $2.00
C. $1.80
D. $1.60
Answer: B Reference:
Explanation:
Category: Apply
37. I'MaGadgetCo. produces and sells widgets. Last year, it produced 9,000 widgets and sold each
one for $8. To produce the 9,000 widgets, the company incurred variable costs of $27,000 and a
total cost of $36,000. I'MaGadgetCo's average fixed cost to produce 9,000 widgets was
A. $1.00
B. $3.00
C. $4.00
D. $7.00
Answer: A Reference:
Explanation:
Category: Apply
38. The marginal cost curve is generally ______________, because diminishing marginal returns
implies that additional units are ________________________.
A. downward-sloping; more costly to produce
B. upward-sloping; more costly to produce
C. downward-sloping; less costly to produce
D. upward-sloping; less costly to produce
Answer: B Reference:
Explanation:
39. Refer to the graph shown above. Based on the information illustrated in the graph, which of
the following is correct?
A. marginal cost line must intersect the average cost line at the middle point of the average cost
curve
B. marginal cost of production is below the average cost for producing previous units
C. producing one more unit is reducing average costs overall
D. producing a marginal unit is increasing average costs overall
Answer: D Reference:
Explanation:
40. Refer to the diagram above. Based on the information illustrated in the graph, which of the
following is correct?
A. producing a marginal unit is reducing average costs overall
B. the marginal cost of production for producing an additional unit is below the cost for
producing the earlier units
C. the transition point between where MC is pulling down and pulling up AC always occurs at the
minimum point of the AC curve
D. low marginal costs first pull up the overall average costs
Answer: C Reference:
Explanation:
41. Whatever the firm’s quantity of production, _____________ must exceed total costs if it is to earn
a profit.
A. marginal costs
B. average costs
C. total revenue
D. variable costs
Answer: C Reference:
Explanation:
42. Fixed costs are important because, at least in the ___________, the firm _______________.
A. long run; cannot alter them
B. short run; cannot alter them
C. long run; can alter them
D. short run; can alter them
Answer: B Reference:
Explanation:
43. The _____________________ curve will always lie below the curve for average cost because
average cost includes _____________ in the numerator of the calculation.
A. marginal cost; total costs
B. marginal cost; fixed costs
C. average variable cost; fixed costs
D. average variable cost; total costs
Answer: C Reference:
Explanation:
44. In order to calculate marginal cost, the change in ______________ is divided by the amount of
change in quantity.
A. either total cost or average cost
B. increasing marginal returns
C. either total cost or variable cost
D. decreasing marginal returns
Answer: C Reference:
Explanation:
45. Which of the following should typically be ignored because spending has already been made
and cannot be changed?
A. variable costs
B. sunk costs
C. marginal costs
D. average marginal costs
Answer: B Reference:
Explanation:
46. ____________ tells a firm whether it can earn profits given the price in the market.
A. Marginal cost
B. Total cost
C. Average cost
D. Average marginal cost
Answer: C Reference:
Explanation:
47. If a comparison between average cost and price reveals whether a firm is earning profits, then
a comparison between average variable cost and price reveals
A. that if the market price exceeds average cost, profits will be positive.
B. that if the market price is below average cost, then profits will be negative.
C. total revenues are the quantity produced multiplied by the price.
D. whether the firm is earning profit if fixed costs are left out of the calculation.
Answer: D Reference:
Explanation:
48. If I'maJuiceCo. establishes a bottling plant in Delaware, it will most likely
A. use production technologies that require more workers.
B. strive for economies of scale where quantity of output falls as the cost of production falls.
C. strive to reach economies of scale that will result in producing at a higher average cost.
D. use production technologies that conserve on the number of workers.
Answer: D Reference:
Explanation:
49. When __________________ exist, doubling of all inputs will result in more than doubling output,
which means __________________________________________.
A. economies of scale; a larger factory can produce at a lower average cost than a smaller
company.
B. economies of scale; a smaller factory can produce at a lower average cost than a larger
company.
C. low labor inputs; larger scale of production leads to higher costs.
D. labor inputs; economies-of-scale curve is U-shaped.
Answer: A Reference:
Explanation:
50. The economies-of-scale curve is a long-run average cost curve, because
A. it allows all factors of production to change.
B. fixed costs cannot be changed.
C. only variable costs are allowed to change.
D. only marginal costs are allowed to change
Answer: A Reference:
Explanation:
51. A situation known as _____________________ occurs when all production inputs are allowed to
expand, but that expansion does not result in much of a change in the average cost of
production.
A. returns to scale
B. economies of scale
C. constant returns to scale
D. diminishing marginal returns
Answer: C Reference:
Explanation:
52. A situation where the level of output, scale and average costs are all rising is called
A. decreasing returns to scale
B. diseconomies of scale
C. diminishing returns to scale
D. both a and b are correct
Answer: D Reference:
Explanation:
53. _____________________ help to explain why every economy, as it develops, has an increasing
proportion of its population living in urban areas.
A. Economies of scale
B. Constant returns to scale
C. Agglomeration factors
D. Diseconomies of scale
Answer: C Reference:
Explanation:
54. The graph above illustrates the electricity market. Consider market competition between firms
where price is based on AR and select the most appropriate answer.
A. this market is perfectly competitive with excess profits possible in the short-run
B. this market is imperfectly competitive with excess profits possible in the short-run
C. this market is imperfectly competitive with excess profits possible in the long-run
D. this market is perfectly competitive with negative profits possible in the long-run
Answer: B Reference:
Explanation:
55. The graph above illustrates the electricity market. Consider market competition between firms
where price is based on AR and select the most appropriate answer.
A. in the short-run, the demand curve and average revenue shift as other firms enter the market
and increase competition
B. in the short-run, the demand curve and average revenue shift as other firms leave the market
and decrease competition
C. in the long-run, the demand curve and average revenue shift as other firms enter the market
and increase competition
D. in the long-run, the demand curve and average revenue shift as other firms leave the market
and decrease competition
Answer: C Reference:
Explanation:
56. Economies of scale may arise from all but one of the following. Which one is it?
A. doubling promotional expenses to expand sale more than proportionately
B. having a larger retail space can expand sales more than proportionately
C. spreading the fixed-costs of administration over more customers holds average costs down
D. government economic subsidies protect firms from competition to avoid losses.
Answer: D Reference:
Explanation:
57. The future of cities in the United States and in other countries will be determined by their
ability to benefit from the _________________ and to minimize or counterbalance the
______________________.
A. economies of agglomeration; corresponding diseconomies
B. economies of scale; agglomeration factors
C. diverse population; greater returns to scale of illegal activities
D. constant returns to scale; market-orientated system
Answer: A Reference:
Explanation:
Essay Questions
1. Briefly explain how the total revenue for a profit-seeking firm is determined.
Reference:
Explanation: The total revenue for a profit-seeking firm is determined by the price that a firm can
charge and the quantity that it can sell, which in turn will be related to demand for its products
and on the number of other firms that are selling similar or identical products.
2. Briefly describe the spectrum of competitive situations faced by firms in markets.
Reference:
Explanation: Firms face different competitive situations. At one extreme there is perfect
competition, which involves many firms all trying to sell identical products. At the other extreme
there is monopoly, which involves only one firm selling a product, and this firm faces no
competition. Monopolistic competition and oligopoly fall between the extremes of perfect
competition and monopoly. Monopolistic competition is a situation with many firms selling
similar, but not identical, products. An oligopoly refers to a situation with few firms that sell
identical or similar products.
3. Briefly describe the short-run perspective of a firm's total costs. Provide a brief explanation of
what a production technology refers to and explain how production technology relates to a firm's
long-run perspective.
Reference:
Explanation: In a short-run perspective, a firm’s total costs can be divided into fixed costs, which a
firm must incur before producing any output, and variable costs, which the firm incurs in the act
of producing.
A production technology refers to a specific combination of labor, physical capital and technology
that makes up a particular method of production. In the long run, firms can choose their
production technology, and so all costs become variable costs. In making this choice, firms will try
to substitute relatively inexpensive inputs for relatively expensive inputs where possible, so as to
produce at the lowest possible long-run average cost.
4. Briefly explain what is meant by the term "fixed costs" and provide three examples of same.
What determines a firm's level of fixed costs?
Reference:
Explanation: Fixed costs are expenditures that must be made before production starts and that do
not change regardless of the level of production, at least not in the short run of weeks and
months. Fixed costs can take many forms: for example, machinery or equipment, physical space
for a retail or manufacturing business, research and development costs to develop new
technology, even an expense like advertising to popularize a brand name. The level of fixed costs
varies according to the specific line of business.
5. Briefly explain what is meant by the term "variable costs" and provide three examples of same.
Reference:
Explanation: Variable costs are a firm's costs that are incurred in the act of producing and will
increase with the quantity produced. Labor is treated as a variable cost, as are the costs of
physical inputs, like the metal and plastic involved in manufacturing a car or the cloth for making
shirts and trousers.
6. Contrast the role of fixed costs and variable costs in economic decisions about future
production and pricing.
Reference:
Explanation: Fixed costs are sunk costs because they are in the past and cannot be altered. For
this reason, fixed costs should play no role in economic decisions about future production or
pricing. Variable costs typically show diminishing marginal returns, so that the marginal cost of
producing higher levels of output rises. Variable costs can change over time and should continue
to play a role in economic decisions about future production or pricing.
7. Briefly discuss marginal costs, including an explanation of how they are calculated; any
condition that is typical to them, and what makes knowing them useful.
Reference:
Explanation: Marginal costs are calculated by taking the change in total cost or the change in
variable cost, and dividing it by the change in output for each possible change in output.
Marginal costs are typically rising. A firm can compare marginal cost to the additional revenue it
gains from selling another unit to find out whether its marginal unit is adding to profit.
8. Briefly discuss average costs, including how they are calculated, how they are typically appear
on a graph, and what they relate to profitability.
Reference:
Explanation: Average cost is calculated by taking total cost and dividing by total output at each
different level of output. Average costs are typically U-shaped on a graph. If a firm’s average cost
of production is lower than the market price, a firm will be earning profits.
9. Briefly discuss average variable costs, including how they are calculated, how they typically on a
graph, and how they are related to determining profitability.
Reference:
Explanation: Average variable cost is calculated by taking variable cost and dividing by the total
output at each level of output. Average variable costs are typically U-shaped. If a firm’s average
variable cost of production is lower than the market price, then the firm would be earning profits
if fixed costs are left out of the picture.
10. Briefly explain what the term "agglomeration economies" refers to and briefly describe what
the fundamental reason for the development of this particular type of economy relates to. Provide
two examples of factors associated with agglomeration economies and identify what these factors
help to explain. Identify two factors that would lead to diseconomies and briefly explain how the
future of many of the world's cities will be likely be determined.
Reference:
Explanation: Agglomeration economies refer to the economies created by the concentration of
large populations in a large city. The fundamental reason for agglomeration economies relates to
the idea of economies of scale in a broad sense. Examples of the factors associated with
agglomeration economies include: cities provide a large group of nearby customers, so that
businesses can produce at an efficient economy of scale; they also provide a large group of
workers and suppliers, so that business can hire easily and purchase whatever specialized inputs
they need; many of the attractions of cities, like sports stadiums and museums, can only operate
if they can draw on a large nearby population base, and cities are also big enough to offer a wide
variety of products, which is what many shoppers are looking for. These agglomeration factors
help to explain why every economy, as it develops, has an increasing portion of its population
living in urban areas. At some point, agglomeration economies must turn into diseconomies due
to negative factors that include: traffic congestion may reach a point where the gains from being
geographically nearby are counterbalanced by how long it takes to travel. High densities of
people, cars and factories can mean more garbage and air and water pollution. Facilities like parks
or museums may become overcrowded. There may be economies of scale for negative activities
like crime, because high densities of people and businesses, combined with the greater
impersonality of cities, make it easier for illegal activities as well as legal ones. The future of cities,
both in the United States and in other countries around the world, will be determined by their
ability to benefit from the economies of agglomeration and to minimize or counterbalance the
corresponding diseconomies.