ECO5000 - Exam Practice (Cost of Production) - without answers

PRACTICE QUESTIONS COST OF PRODUCTION

1. Supply is usually most elastic in the 

1. momentary period.
2. short run.
3. long run.
4. competitive run.

2. Marginal cost is defined as 

1. average cost X quantity sold
2. change in total cost as a result of change in the price of a product
3. change in total cost as a result of change in an additional unit of output
4. total cost divided by total output

3. The marginal cost curve will always intersect with its average total cost curve at its

1. maximum point
2. mid-point
3. minimum point
4. none of the above

4. When a firm is experiencing diseconomies of scale,

1. the MP curve is falling.
2. the LRAC curve is rising.
3. it must also experience diminishing returns to labor.
4. the MC curve is falling.

5. Which cost always rises as output increases?

1. Total cost.
2. Marginal cost.
3. Average total cost.
4. Average fixed cost.

6. The minimum efficient scale of a firm: 

1. is realized somewhere in the range of diseconomies of scale. 
2. occurs where marginal product becomes zero. 
3. is in the middle of the range of constant returns to scale. 
4. is the smallest level of output at which long-run average total cost is minimized.

The Sunshine Corporation finds that its costs are $40 when it produces no output. Its total variable costs (TVC) change with output as shown in the accompanying table. Use the information below to answer question number 1-5.

7.  The total cost of producing 3 units of output:

1. is $65.
2. is $105.
3. is $145.
4. is $185.

8. The average total cost of 3 units of output:

1. is $65.
2. is $21.67.
3. is $40.
4. is $35.

9.  The average fixed cost of 3 units of output:

1. is $13.33.
2. is $12.50.
3. is $40.
4. is $18.50.

10.  The marginal cost of the third unit of output:

1. is $105.
2. is $25.
3. is $15.
4. is $20.

11.  Based on the information above, we can say that the firm is:

1. selling its product in a perfectly competitive market.
2. selling its product in an imperfectly competitive market.
3. hiring workers in a perfectly competitive market.
4. hiring workers in an imperfectly competitive market.

12.  The long run is characterized by:

1. the relevance of the law of diminishing returns. 
2. at least one fixed input. 
3. insufficient time for firms to enter or leave the industry. 
4. the ability of the firm to change its plant size.

13. The law of diminishing returns indicates that: 

1. as extra units of a variable resource are added to a fixed resource, marginal product will decline beyond some point. 
2. because of economies and diseconomies of scale a competitive firm's long-run average total cost curve will be U-shaped. 
3. the demand for goods produced by purely competitive industries is downward sloping. 
4. beyond some point the extra utility derived from additional units of a product will yield the consumer smaller and smaller extra amounts of satisfaction.

PROBLEM SOLVING QUESTIONS

13. The average fixed cost of producing two products in a workshop is RM600 while the average

      variable cost is RM140. For an output of three products, the average fixed cost is RM400, while 

      the average variable cost is RM120. Calculate the marginal cost of increasing production from 

      two to three products.

14. A carpenter manufacturers chairs. His fixed costs are RM250 per week, and his variable costs are    
      RM50 per chair. He has a contract to make ten chairs per week, sells them for RM100 each, and
      thus makes RM25 profit per chair. He is offered another contract to make an additional four chairs
      a week, for a price of RM66 per chair. Should he accept this contract? Explain your answer.

15. The Following data applies to a toymaker manufacturing rocking horses:

Units of output (per week) Marginal cost (in RM)

1 80

2 60

3 80

4 120

5 160

6 200

Fixed costs are RM200 per week.

Calculate:

a. the total variable cost at each level of output

b. the total cost at each level of output

c. the average variable cost at each level of output: and

d. the average total cost at each level of output.