Q: Suppose a firm’s total cost function in the short run is $$C(q) = 100 + 5q + 2q^2$. What is the marginal cost (MC) when q = 10$?

$$MC = 5 + 4q = 5 + 4 \times 10 = 45$$

Question 1

A firm is considering two alternative uses for a machine it owns. If it uses the machine to produce widgets, it will earn $$5,000. If it rents the machine to another company, it will earn 4$$,000. What is the opportunity cost of using the machine to produce widgets?

Accepted Answer

$4,000

Question 2

Which of the following best describes a sunk cost?

Accepted Answer

A past expenditure that cannot be recovered and should not affect current production decisions.

Question 3

Suppose a firm’s total cost function in the short run is $$C(q) = 100 + 5q + 2q^2$. What is the marginal cost (MC) when q = 10$?

Accepted Answer

$$MC = 5 + 4q = 5 + 4 	imes 10 = 45$$

Question 4

A firm faces a specific tax of $$t$$ per unit of output. Which of the following best describes the effect of this tax on the firm’s cost curves?

Accepted Answer

Both the marginal cost (MC) and average cost (AC) curves shift upward by $$t.$$

Question 5

If a firm’s production function is Cobb-Douglas: $$q = L$$^{0.6}$$ K$$^{0.4}$$, and input prices are w = 24$ for labor and r = 8$ for capital, what is the cost-minimizing ratio of capital to labor (K/L$)?

Accepted Answer

$$K/L = 2$$

Question 6

Which of the following statements about the long-run cost function is correct?

Accepted Answer

In the long run, all costs are variable and fixed costs are avoidable, so $$F = 0.$$

Question 7

A firm’s average cost (AC) curve is U-shaped in the short run. If a lump-sum franchise tax is imposed, what happens to the output level at which the after-tax AC curve reaches its minimum?

Accepted Answer

The output level at which AC is minimized does not change.

Question 8

Suppose a firm’s isocost line is given by $$C = wL + rK$$, where $$w is $$the wage rate and $$r is $$the rental rate of capital. If the firm’s total cost is $$C = 200$$, $$w = 10$$, and $$r = 20$$, what is the equation for the isocost line when solved for $$K$$?

Accepted Answer

Question 9

Which of the following best describes economies of scale?

Accepted Answer

Average cost of production falls as output increases.

Question 10

A firm produces two goods, A and B. If the cost of producing both goods together is less than the cost of producing them separately, this is an example of:

Accepted Answer

Economies of scope

Question 11

Suppose a firm’s short-run total cost is $$C(q) = 50 + 10q. $$What is the average fixed cost (AFC) when $$q = 5$$?

Accepted Answer

$$AFC = 50/5 = 10$$

Question 12

If a firm experiences learning by doing, what happens to its average cost curve as cumulative output increases?

Accepted Answer

The average cost curve shifts downward.

Question 13

A firm’s production function is fixed-proportions: one unit of labor and one unit of capital produce one unit of output. If the wage rate is $$w$$ and the rental rate of capital is $$r$$, what is the long-run cost function for producing $$q$$ units?

Accepted Answer

$$C(q) = (w + r)q$$

Question 14

Which of the following is NOT included in the economic cost of production?

Accepted Answer

Sunk costs

Question 15

If the marginal cost (MC) curve is below the average cost (AC) curve, what happens to the AC curve as output increases?

Accepted Answer

The AC curve decreases.

Question 16

A firm is considering producing abroad, where both the wage rate and the cost of capital are half as much as at home. If the production technology does not change, what happens to the firm’s cost-minimizing input mix?

Accepted Answer

The input mix remains the same, but total cost decreases.

Question 17

Which rule states that a firm should allocate its spending so that the last dollar spent on each input yields the same marginal product?

Accepted Answer

Last-dollar rule

Question 18

If a firm’s average variable cost (AVC) is $$20$$ and average fixed cost (AFC) is $$5 at a $$certain output level, what is the average cost (AC)?

Accepted Answer

$$AC = AVC + AFC = 20 + 5 = 25$$

Question 19

Which of the following best describes the long-run average cost (LRAC) curve?

Accepted Answer

It is the envelope of all possible short-run average cost curves.

Microeconomics Chapter 7: Costs – Study Notes

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