Chapter 6 - Assignment Essays

question

Which of the following is NOT an explicit cost?
a. $1500 to buy bricks for the driveway of your house
b. The $100 in interest you lost by using your CD funds to pay for new pizza oven
c. $200 to hire 2 gardeners for landscaping work
d. $25 for lunch to serve to your workers

answer

b. The $100 in interest you lost by using your CD funds to pay for new pizza oven

question

Sarah earns $40,000 per year working for a large corporation. She is thinking of quitting this job to work full time in her own business. She will invest her savings of $50,000 (which currently has an annual 10% rate of return) into the business. Her annual opportunity cost of this new business is
a. $45,000
b. $0
c. $40,000
d. $90,000

answer

a. $45,000

question

Manisha could work for another firm making $10,000 per month, but she decides to open her own gourmet cheese store and pay herself $2,000 per month. In her first month of operations, she spends $6,000 on cheese, $1,000 on other items, and $2,500 on rent. She had a great opening month, and brought in revenues of $14,500. What are Manisha's economic profits?
a. -$6,000
b. $3,000
c. -$5,000
d. $4,000

answer

c. -$5,000
economic profits= TR-TC
14,500-10,000-6,000-1,000-2,500= -5,000

question

If a firm buys a delivery can for $18,000 and can resell it in 2 years for $7,500, the opportunity cost of using the van is
a. $7,500
b. $10,500
c. $3,750
d. $18,000

answer

a. $7,500

question

If a firm buys a delivery van for $18,000 and can resell it in 2 years for $7,500, the sunk cost is
a. $10,500
b. $0
c. $18,000
d. $7,500

answer

a. $10,500

question

If a firm produces one unit, the variable cost is $3. When the firm produces two units, the variable cost is $6. What is the marginal cost associated with two units sold of production?
a. $2
b. $6
c. $3
d. $0.5

answer

c. $3

question

Suppose the total cost of producing t-shirts can be represented as TC=50+2q^2. The marginal cost of the 5th T-shirt is
a. 12
b. 20
c. 60
d. 10

answer

b. 20
MC = dTC/dq = 4q
TC of 5th t-shirt: 4(5)= 20

question

Suppose the total cost of producing t-shirts can be represented as TC=50+2q^2. The average cost of the 5th t-shirt is
a. 2
b. 60
c. 20
d. 52

answer

c. 20
AC= TC/q
AC= (50+2q^2)/q
AC= (50/q)+(2q)
AC= (50/5)+(2*5)
AC= 10+10=20

question

If the average cost of producing a good is increasing as a firm produces more of the good, which of the following must be TRUE?
a. MC > AVC
b. AFC is falling
c. AVC is rising
d. all of the above

answer

d. all of the above

question

The slope of the isoquant tells the firm how much
a. capital must decrease to keep output constant when labor increases by one unit
b. a unit of capital costs relative of the cost of labor
c. output increases when capital and labor are doubled
d. output increases when labor increases by one unit

answer

a. capital must decrease to keep output constant when labor increases by one unit

question

If the marginal rate of technical substitution for a cost minimizing firm is 10, and the wage rate for labor is $5, what is the rental rate for capital.
a. $1
b. $10
c. $0.5
d. $2

answer

$0.5
MRTS = w/r
10 = 5/r
r= $0.5

question

If producing more output increases average cost then
a. there are no economies of scale
b. there are diseconomies of scope
c. there are economies of scope
d. there are diseconomies of scale

answer

d. there are diseconomies of scale

question

The production of cigarettes is highly automated; however, a worker is required to monitor each machine. Machines and workers do not interact with one another. Given this information, there are most likely
a. increasing returns to scale
b. economies of scale
c. constant returns to scales
d. economies of scope

answer

c. constant returns to scales

question

Learning by doing is represented by
a. a decrease in the average total cost curve
b. an increase in the average total cost curve and a decrease in the marginal cost curve
c. no change in the average total cost curve
d. an increase in the average total cost curve

answer

a. a decrease in the average total cost curve

question

Why do many people choose NOT to read the manuals included with their new computer?
a. They perceive that learning by reading is not sophisticated
b. They perceive that learning by doing decreases costs faster than learning by reading
c. They believe that the manuals are not accurate
d. They perceive that learning by doing is more enjoyable than learning by reading

answer

b. They perceive that learning by doing decreases costs faster than learning by reading

question

Economies of scope exist between book publishing and magazine publishing if
a. the cost of publishing a book falls over time as the publisher acquires more experience
b. the cost of publishing a magazine is lower for firms that publish many magazines than for firms that publish only one magazine
c. the cost of a publishing a book is not subject to diminishing marginal returns
d. the cost of publishing a magazine is lower for book publishers than for other firms.

answer

d. the cost of publishing a magazine is lower for book publishers than for other firms.

question

Suppose the cost of producing two goods, x and y, can be represented as C = ax + by + cxy. If there are economies of scope, then which of the following must be TRUE?
a. a + b = c
b. c = 0
c. c > 0
d. c < 0

answer

d. c < 0

question

Travel websites such as Travelocity tend to offer reservation services for multiple travel modes. This is because
a. once the firm has the reservation technology for airlines, there are economies of scope in offering the same service for railroads
b. the firms have contractual obligations to offer reservations for airlines and railroads, for example
c. once the firm has the reservation technology for airlines, there are economies of scale in offering the same service for railroads
d. the firms have statutory obligations to offer reservations for airlines and railroads, for example

answer

a. once the firm has the reservation technology for airlines, there are economies of cope in offering the same service for railroads.

question

A US electronic firm is considering moving its production to a plant in Mexico. Its estimated production function is given by q=20LK

1. Does this production function exhibit increasing/decreasing/constant returns to scale?
2. Given that the MPl=20K, MPk=20L. And the wage rate for hiring one Mexican worker is $15, while the rental rate for capital is $20. How much labor and capital this firm should use to minimize its cost to produce 450 units of output?
3. How much is it cost to produce 450 units of output given by the labor and capital calculated of part (b)

answer

1. increasing returns to scale.
-Q=20 if L=K=1.
-Q=80 if L=K=2
-Increasing labor and capital by 2 more than doubles output

2. L= 5.4 & K= 4.1
-MPl/MPk = w/r
-MPl/MPk = K/L
-w/r = 15/20 = 3/4
-thus, K/L = 3/4 or
K= (3/4)L
-substitute q=450 & K=(3/4)L into 20KL=q
-20((3/4)L)*L=450
-solve for L = 5.4
-solve for K = (3/4)5.4= 4.1

3. 162
TC = wL + rK
TC = 15(5.4) + 20(4.1)= 162

1 of 19

question

answer

b. The $100 in interest you lost by using your CD funds to pay for new pizza oven

question

answer

a. $45,000

question

answer

c. -$5,000
economic profits= TR-TC
14,500-10,000-6,000-1,000-2,500= -5,000

question

If a firm buys a delivery can for $18,000 and can resell it in 2 years for $7,500, the opportunity cost of using the van is
a. $7,500
b. $10,500
c. $3,750
d. $18,000

answer

a. $7,500

question

If a firm buys a delivery van for $18,000 and can resell it in 2 years for $7,500, the sunk cost is
a. $10,500
b. $0
c. $18,000
d. $7,500

answer

a. $10,500

question

answer

c. $3

question

Suppose the total cost of producing t-shirts can be represented as TC=50+2q^2. The marginal cost of the 5th T-shirt is
a. 12
b. 20
c. 60
d. 10

answer

b. 20
MC = dTC/dq = 4q
TC of 5th t-shirt: 4(5)= 20

question

Suppose the total cost of producing t-shirts can be represented as TC=50+2q^2. The average cost of the 5th t-shirt is
a. 2
b. 60
c. 20
d. 52

answer

c. 20
AC= TC/q
AC= (50+2q^2)/q
AC= (50/q)+(2q)
AC= (50/5)+(2*5)
AC= 10+10=20

question

If the average cost of producing a good is increasing as a firm produces more of the good, which of the following must be TRUE?
a. MC > AVC
b. AFC is falling
c. AVC is rising
d. all of the above

answer

d. all of the above

question

answer

a. capital must decrease to keep output constant when labor increases by one unit

question

If the marginal rate of technical substitution for a cost minimizing firm is 10, and the wage rate for labor is $5, what is the rental rate for capital.
a. $1
b. $10
c. $0.5
d. $2

answer

$0.5
MRTS = w/r
10 = 5/r
r= $0.5

question

If producing more output increases average cost then
a. there are no economies of scale
b. there are diseconomies of scope
c. there are economies of scope
d. there are diseconomies of scale

answer

d. there are diseconomies of scale

question

answer

c. constant returns to scales

question

answer

a. a decrease in the average total cost curve

question

answer

b. They perceive that learning by doing decreases costs faster than learning by reading

question

answer

d. the cost of publishing a magazine is lower for book publishers than for other firms.

question

answer

d. c < 0

question

answer

a. once the firm has the reservation technology for airlines, there are economies of cope in offering the same service for railroads.

question

answer

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