Q: Suppose Jill’s restaurant has fixed costs of $$800 per week and hires 3 workers at 650 $$each per week. If she produces 550 pizzas, what is her average total cost (ATC) per pizza? Use the formula $$ATC = \frac{TC}{Q}.$$

$$ATC = \frac{800 + (3 \times 650)}{550} = \frac{800 + 1950}{550} = \frac{2750}{550} = 5.00$$

Question 1

Which of the following best describes the law of diminishing returns as it applies to Jill’s pizza restaurant?

Accepted Answer

As more workers are added to a fixed number of ovens, the marginal product of labor eventually decreases.

Question 2

Suppose Jill’s restaurant has fixed costs of $$800 per week and hires 3 workers at 650 $$each per week. If she produces 550 pizzas, what is her average total cost (ATC) per pizza? Use the formula $$ATC = \frac{TC}{Q}.$$

Accepted Answer

$$ATC = \frac{800 + (3 	imes 650)}{550} = \frac{800 + 1950}{550} = \frac{2750}{550} = 5.00$$

Question 3

Which of the following is an example of an implicit cost for Jill’s pizza restaurant?

Accepted Answer

The forgone salary Jill could have earned working elsewhere.

Question 4

If the marginal cost (MC) of producing an additional pizza is below the average total cost (ATC), what happens to the ATC as output increases?

Accepted Answer

ATC decreases.

Question 5

A firm’s long-run average cost curve is U-shaped primarily because:

Accepted Answer

Economies of scale are followed by diseconomies of scale as output increases.

Question 6

Which equation correctly represents the marginal cost (MC) of production?

Accepted Answer

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

Question 7

If a firm is operating in the long run and experiences constant returns to scale, what happens to its long-run average cost (LRAC) as output increases?

Accepted Answer

LRAC remains unchanged.

Question 8

Which of the following best describes the marginal rate of technical substitution (MRTS)?

Accepted Answer

The rate at which a firm can substitute one input for another while keeping output constant.

Question 9

A publishing company increases its output of books. Which of the following is most likely a fixed cost in the short run?

Accepted Answer

Lease payment for the factory.

Question 10

At the cost-minimizing combination of labor and capital, which of the following must be true?

Accepted Answer

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

Question 11

If Jill’s marginal cost of producing pizzas rises above her average variable cost, what will happen to her average variable cost as she increases output?

Accepted Answer

Average variable cost will increase.

Question 12

Which of the following is NOT a reason why a car company might experience economies of scale?

Accepted Answer

Difficulty managing a very large firm.

Question 13

If the price of labor decreases while the price of capital remains constant, what happens to the cost-minimizing combination of inputs for a firm?

Accepted Answer

The firm will use more labor and less capital.

Question 14

Which of the following best explains why the average fixed cost (AFC) curve continually declines as output increases?

Accepted Answer

Fixed costs are spread over a larger number of units.

Question 15

A firm’s total cost (TC) is $$4,050$$ when producing $$625$$ pizzas per week. If the fixed cost (FC) is $$800$$, what is the variable cost (VC)? Use the formula $$TC = FC + VC.$$

Accepted Answer

$$VC = 4,050 - 800 = 3,250$$

Question 16

Which of the following statements about explicit and implicit costs is correct?

Accepted Answer

Implicit costs represent the opportunity costs of using resources owned by the firm.

Question 17

If a firm’s marginal product of labor is increasing, what happens to total output as more workers are hired?

Accepted Answer

Total output increases at an increasing rate.

Question 18

Which of the following best describes the minimum efficient scale?

Accepted Answer

The lowest level of output at which all economies of scale are exhausted.

Question 19

If a firm’s long-run average cost increases as output increases, the firm is experiencing:

Accepted Answer

Diseconomies of scale.

Question 20

Which of the following is true about the relationship between marginal cost (MC) and average total cost (ATC)?

Accepted Answer

When MC is above ATC, ATC is rising.

Production and Costs: Technology, Cost Structures, and Input Choices in Microeconomics

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