Q: Given the following cost data for a factory: Fixed costs are $$\5000$ per month, variable costs are $$\$$10$$ per unit, and the factory produces $$1000$$ units per month. What is the average total cost (ATC)?

$$ATC = \frac{5000 + 10 \times 1000}{1000} = \15$

Question 1

Which of the following best describes the difference between economic cost and accounting cost?

Accepted Answer

Accounting cost includes actual expenses and depreciation, while economic cost includes opportunity cost as well as actual expenses.

Question 2

A university owns valuable lakeshore land in downtown Chicago. When deciding whether to build a new law school there or in the suburbs, what cost concept should be considered?

Accepted Answer

The opportunity cost of the downtown land, which could be sold for substantial funds.

Question 3

Which of the following is a sunk cost in the context of a pharmaceutical company developing a new drug?

Accepted Answer

The R&D expenses incurred during drug development.

Question 4

Suppose a firm has a total cost function $$C = wL + rK$$, where $$w is $$the wage rate, $$L is $$labor, $$r is $$the rental rate of capital, and $$K is $$capital. What does the slope of the isocost line represent?

Accepted Answer

The ratio of the wage rate to the rental rate of capital, $$-w/r.$$

Question 5

A pizzeria can resell its equipment if it goes out of business. Which type of cost does this equipment represent?

Accepted Answer

Fixed cost.

Question 6

If a firm is producing at a level where the marginal cost (MC) is less than the average total cost (ATC), what is happening to the ATC as output increases?

Accepted Answer

ATC is decreasing.

Question 7

Given the following cost data for a factory: Fixed costs are $$\5000$ per month, variable costs are $$\$$10$$ per unit, and the factory produces $$1000$$ units per month. What is the average total cost (ATC)?

Accepted Answer

$$ATC = \frac{5000 + 10 	imes 1000}{1000} = \15$

Question 8

Which of the following best describes the user cost of capital?

Accepted Answer

The annual cost of owning and using a capital asset, including economic depreciation and forgone interest.

Question 9

A firm faces diminishing marginal returns to labor. What happens to marginal cost (MC) as output increases?

Accepted Answer

Marginal cost increases.

Question 10

If a firm wants to minimize the cost of producing a given output, which condition must hold between the marginal products and input prices?

Accepted Answer

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

Question 11

Which of the following is true about the relationship between short-run and long-run average cost curves?

Accepted Answer

The long-run average cost curve is the envelope of the short-run average cost curves.

Question 12

A steel firm faces an effluent fee for wastewater disposal. What is the likely effect on its input choices?

Accepted Answer

It will use less of the input that generates effluent and substitute toward cleaner inputs.

Question 13

If a firm doubles all inputs and output more than doubles, what is this called?

Accepted Answer

Increasing returns to scale.

Question 14

Which of the following is NOT a reason for economies of scale?

Accepted Answer

Increasing complexity and inefficiency in management.

Question 15

A software company spends millions developing a new program. After development, which type of cost does this expenditure represent?

Accepted Answer

Sunk cost.

Question 16

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

Accepted Answer

It becomes steeper.

Question 17

Which formula correctly expresses marginal cost (MC) in terms of the wage rate ($$w) $$and marginal product of labor ($$MP_L$$)?

Accepted Answer

$$MC = w / MP_L$$

Question 18

A firm is currently using more labor and less capital than the cost-minimizing combination. What should it do to minimize costs?

Accepted Answer

Decrease labor and increase capital.

Question 19

Which of the following statements about sunk costs is correct?

Accepted Answer

Sunk costs are expenditures that cannot be recovered and should not affect future decisions.

Question 20

If a firm experiences diseconomies of scale, what happens to average cost as output increases?

Accepted Answer

Average cost increases.

The Cost of Production: Microeconomics Study Notes

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