Question 1

Which of the following best describes the opportunity cost in the context of choosing the location for a new law school building, as discussed in the study materials?

Accepted Answer

The value of the land that could have been sold if the building was not constructed on it.

Question 2

A firm incurs a one-time expenditure on specialized equipment that cannot be converted for alternative use. Which type of cost is this?

Accepted Answer

Sunk cost

Question 3

Suppose a pizzeria can resell its equipment if it goes out of business. According to the study materials, what does this imply about the pizzeria's sunk costs?

Accepted Answer

Sunk costs are low because equipment can be resold.

Question 4

Which formula correctly represents marginal cost (MC) as described in the materials?

Accepted Answer

$$MC = \frac{\Delta TC}{\Delta q}$$

Question 5

In the short-run cost of aluminum smelting, what happens to average variable cost (AVC) when output exceeds 600 tons per day?

Accepted Answer

AVC increases because marginal cost rises.

Question 6

What is the user cost of capital, according to the study materials?

Accepted Answer

Economic depreciation plus forgone interest.

Question 7

A firm faces input prices $$w$$ for labor and $$r$$ for capital. What is the equation for the isocost line?

Accepted Answer

$$C = wL + rK$$

Question 8

If the wage rate increases, what happens to the slope of the isocost line?

Accepted Answer

The slope becomes steeper.

Question 9

When a firm minimizes the cost of producing a particular output, which condition must hold?

Accepted Answer

$$\frac{w}{r} = \frac{MP_K}{MP_L}$$

Question 10

Which of the following best describes economies of scale?

Accepted Answer

A doubling of output requires less than a doubling of cost.

Question 11

Tesla’s Gigafactory aims to reduce battery costs by increasing production volume. Which economic concept does this illustrate?

Accepted Answer

Economies of scale

Question 12

What is the degree of economies of scope (SC) as defined in the materials?

Accepted Answer

$$SC = \frac{C(q_1$) + C(q_2$) - C(q_1$, q_2$)}{C(q_1$, q_2$)}$$

Question 13

Which equation describes the learning curve relationship for labor input per unit?

Accepted Answer

$$L = A + BN$$^{-b}$$

Question 14

A firm’s average cost of production declines as cumulative output increases, even if the scale of operation remains constant. What is this phenomenon called?

Accepted Answer

Learning curve effect

Question 15

Which cost function allows for a U-shaped average cost curve and a non-constant marginal cost?

Accepted Answer

$$VC = \beta q + yq^2$

Question 16

If a firm uses a Cobb-Douglas production function $$q = AK$$^{\alpha}$$L^{\beta}$$, what does it mean if $$\alpha + \beta = 1$?

Accepted Answer

The firm has constant returns to scale.

Question 17

What is the scale economies index (SCI) as defined in the materials?

Accepted Answer

$$SCI = 1 - EC$$

Question 18

In the context of cost minimization, what does the Lagrange multiplier represent?

Accepted Answer

The marginal cost of production.

Question 19

If a firm suddenly faces a doubling of the wage rate, what is the expected effect on its cost-minimizing input choice according to the Cobb-Douglas cost function?

Accepted Answer

The firm will use less labor and more capital.

Question 20

Which of the following is NOT a reason for economies of scale as described in the materials?

Accepted Answer

The firm faces higher input prices as it increases output.

Chapter 7: The Cost of Production – Microeconomics Study Notes

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