Question 1

Which of the following best describes the relationship between average fixed cost (AFC) and output, as shown in the cost curves?

Accepted Answer

AFC decreases as output increases because fixed costs are spread over more units.

Question 2

Suppose a firm’s total cost (TC) function is given by $$TC = 100 + 5Q + Q^2$. What is the marginal cost (MC) when Q = 10$?

Accepted Answer

$$MC = 5 + 2Q = 5 + 2(10) = 25$$

Question 3

Which of the following statements about the shape of the Average Variable Cost (AVC) curve is correct?

Accepted Answer

The AVC curve is typically U-shaped due to initially increasing and then diminishing returns.

Question 4

If a firm experiences economies of scale, what happens to its long-run average cost (LRAC) as output increases?

Accepted Answer

LRAC decreases as output increases.

Question 5

A firm’s short-run marginal cost (MC) curve intersects the average total cost (ATC) curve at:

Accepted Answer

The minimum point of the ATC curve.

Question 6

Which of the following is a correct interpretation of the law of diminishing marginal returns?

Accepted Answer

As more units of a variable input are added to fixed inputs, the additional output from each new unit will eventually decrease.

Question 7

If a firm’s total fixed cost (TFC) is $$200$$ and it produces $$20$$ units, what is its average fixed cost (AFC)?

Accepted Answer

$$AFC = \frac{200}{20} = 10$$

Question 8

Which of the following best explains why the marginal cost (MC) curve eventually rises as output increases?

Accepted Answer

Because of the law of diminishing marginal returns.

Question 9

A firm’s average total cost (ATC) is $$50$$ when producing $$10$$ units, and its total fixed cost (TFC) is $$200. $$What is its average variable cost (AVC)?

Accepted Answer

$$AVC = ATC - AFC = 50 - (\frac{200}{10}) = 30$$

Question 10

Which of the following is NOT a characteristic of fixed costs?

Accepted Answer

They vary directly with the quantity produced.

Question 11

Suppose a firm’s total cost (TC) is $$500$$ when producing $$0$$ units and $$700$$ when producing $$10$$ units. What is the total variable cost (TVC) when $$Q = 10$$?

Accepted Answer

$$TVC = TC - TFC = 700 - 500 = 200$$

Question 12

Which of the following best describes the relationship between marginal cost (MC) and average variable cost (AVC) when MC is below AVC?

Accepted Answer

AVC is decreasing.

Question 13

If a firm’s marginal cost (MC) is greater than its average total cost (ATC), what will happen to ATC as output increases?

Accepted Answer

ATC will increase.

Question 14

Which of the following is an example of a fixed cost for a bakery?

Accepted Answer

Monthly rent for the bakery building.

Question 15

If the total cost (TC) function is $$TC = 300 + 20Q$$, what is the average total cost (ATC) when $$Q = 5$$?

Accepted Answer

$$ATC = \frac{300 + 20 	imes 5}{5} = \frac{400}{5} = 80$$

Question 16

Which of the following best explains why the long-run average cost (LRAC) curve is typically U-shaped?

Accepted Answer

Due to economies of scale at low output levels and diseconomies of scale at high output levels.

Question 17

A firm’s total cost (TC) is $$1000$$ when producing $$50$$ units and $$1200$$ when producing $$60$$ units. What is the marginal cost (MC) of increasing output from $$50 to$$ $$60$$ units?

Accepted Answer

$$MC = \frac{1200 - 1000}{60 - 50} = \frac{200}{10} = 20$$

The Economic Analysis of Cost: Microeconomics Study Notes

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