ECO 3320

CHAPTER 4

1)If AVC=$5 and AFC=15, then ATC=

a) $10

b) $5

c)   $15

d)   $20

2. Managers undertake an investment only if
   1. Marginal benefits of the investment are greater than zero
   2. Marginal costs of the investment are less than marginal benefits of the investment
   3. Marginal benefits are greater than marginal costs
   4. Investment decisions do not depend on marginal analysis

3. Total cost divided by the total number of inputs is called:
   1. marginal cost
   2. average cost
   3. total cost
   4. variable cost

Use the following to answer questions 4-8:

4. The marginal cost of hiring the 7^th worker is

a) $400

b) $1000

c) $200

d) $0

5. If the firm hires 8 workers, the total amount of fixed costs equals a) $6200

b) $1000

c) $600

d)   $1200

6. If hiring the 4^th worker increases total product by 50 units and the price of each unit is $15,
   1. the firm should not hire the 4^th worker as MB<MC
   2. marginal revenue equals $150
   3. the firm should hire the 4^th worker as MB>MC
   4. the firm should not hire the 4^th worker as MB<TC

7. If the firm hires 5 workers, the average cost equals

a) $10

b) $1000

c) $80

d)   Need more information

8. If the firms hires 5 workers, the average variable costs equals

a) $10

b)     $100

c)   $800

d) Need more information

9. What is the average total cost of hiring the 7^th worker?

a)   $400

b)   $800

c) $1200

d) $1600

10. A firm produces 500 units per week. It hires 20 full-time workers (40 hours/week) at an hourly wage of $15. Raw materials are ordered weekly and they costs $10 for every unit produced. The weekly cost of the rent payment for the factory is $2,250. How do the overall costs breakdown?
    1. total variable cost is $17,000; total fixed cost is $2,250; total cost is $19,250
    2. total variable cost is $12,000; total fixed cost is $7,250; total cost is $19,250
    3. total variable cost is $5,000; total fixed cost is $14,250; total cost is $19.250
    4. total variable cost is $5,000; total fixed cost is $2,250; total cost is $7,250

 11)

If AVC=$15 and AFC=$10, then ATC=

e) $10

f)     $5

g)   $15

h)   $25

12. If a firm produces 10 units, TC=$100. When the firm increase its output to 15 units, TC= $150.

The firm’s variable costs equal to

a) $25

b) $0

c) $50

d) $100

13. If a firm produces 10 units, TC=$100. When the firm increase its output to 15 units, TC= $150.

The firm’s AVC equal to

1. 1. $5

b)   $10

c)   $50

d) $100

14. A firm produces 1000 units per week. It hires 10 full-time workers (40 hours/week) at an hourly wage of $20. Raw materials are ordered weekly and they costs $5 for every unit produced. The weekly cost of the rent payment for the factory is $1,500. How do the overall costs breakdown for the week?
    1. total variable cost is $5,000; total fixed cost is $1,500; total cost is $6,500
    2. total variable cost is $5,000; total fixed cost is $9,500; total cost is $14,500
    3. total variable cost is $13,000; total fixed cost is $1,500; total cost is $14,500
    4. total variable cost is $13,000; total fixed cost is $9,500; total cost is $22,500

15. According to the law of diminishing returns,
    1. Some productions factors are fixed
    2. All inputs are variable
    3. All inputs are fixed
    4. None of the above

16. Total costs increase from $1500 to $1800 when a firm increases output from 40 to 50 units. Which of the following are true?

a) FC = $100

2. MC=300
3. MC=30

d) FC = $400

17. Total costs increase from $1500 to $1800 when a firm increases output from 40 to 50 units. Which of the following are true?
    1. AVC rise by $300
    2. AVC rise by $1800
    3. AVC rise by $1500
    4. AVC rise by $0
18. Total costs increase from $1500 to $1800 when a firm increases output from 40 to 50 units. Which of the following are true?

1. 1. AC rise by $1.50
   2. AC rise by $1.00
   3. AC fall by $1.50
   4. AC fall by $1.00

19. The level of an economic activity should be increased to the point where the       is zero.
    1. Marginal cost
    2. Marginal benefit
    3. Net marginal cost
    4. Net marginal benefit

20. The level of an economic activity should be increased to the point where
    1. Marginal benefits equal to zero
    2. Marginal costs of the investment are less than marginal benefits of the investment
    3. Marginal benefits are greater than marginal costs
    4. Marginal costs are equal to marginal benefits

Use the following to answer questions 11-16:

21. The marginal cost of hiring the 4^th worker is

a) $40

b) $100

c) $20

4. $0

22. If the firm hires 5 workers, the total amount of fixed costs equals

a) $250

b) $50

c) $200

d) $1200

23. If hiring the 6^th worker increases total product by 7 units and the price of each unit is $2,
    1. the firm should not hire the 6^th worker as MB<MC
    2. marginal revenue equals $2
    3. the firm should hire the 6^th worker as MB>MC
    4. the firm should not hire the 6^th worker as MB<TC

24. If hiring the 7^th worker increases total product by 5 units and the price of each unit is $2,
    1. the firm should not hire the 7^th worker as MB<MC
    2. marginal revenue equals $2
    3. the firm should hire the 7^th worker as MB>MC
    4. the firm should not hire the 7^th worker as MB<TC

25. If the firm hires 5 workers, the average cost equals

a) $250

b) $50

1. 3. $5
   4. Need more information

26. If the firms hires 5 workers, the average variable costs equals

a) $200

b)   $50

c)   $80

d)     $40

27. Marginal cost is the                                              cost of producing one additional unit and marginal revenue is the           revenue of selling an additional unit.
    1. Incremental, Incremental
    2. Total, Incremental
    3. Incremental, Total
    4. Total, Total

28. Which is not a fixed cost?
    1. monthly rent of $1,000 with a 12 month lease
    2. an insurance premium of $50 per year, paid last month
    3. Tax accountant’s salary
    4. labor costs paid per hour

29. If you know that with 8 units of output, average fixed cost is $40 and average variable cost is $25, then total cost at this output level is:

a)   $320

b)   $200

c)   $520

d) $1000

30. With fixed costs of $200, a firm has average total costs of $5 and average variable costs of $3. Its output is:

1. 100 units.
2. 40 units.
3. 66.67 units.
4. Need more information

31. Average cost is
    1. Total variable cost divided by total units produced
    2. Total fixed cost divided by total units produced
    3. Total cost divided by total units produced
    4. Equal to marginal cost

32. Marginal cost
    1. Is the additional cost incurred by producing and selling one more unit
    2. Is the total cost incurred by producing and selling one more unit
    3. Is the additional fixed cost incurred by producing and selling one more unit
    4. None of the above

33. When economists speak of “marginal”, they mean
    1. Opportunity
    2. Scarcity
    3. Incremental
    4. Unimportant

34. A manager of a clothing firm is deciding whether to add another factory in addition to one already in production. The manager would compare
    1. The total benefits gained from the two factories to the total costs of running the two

factories.

1. 2. The incremental benefit expected from the second factory to the total costs of running the two factories.
   3. The incremental benefit expected from the second factory to the cost of the second

factory

1. 4. The total benefits gained from the two factories to the incremental costs of running the two factories.

35. A firm is thinking of hiring an additional worker to their organization who they believe can increase total productivity by 100 units a week. The cost of hiring him or her is $1500 per week. If the price of each unit is $20,
    1. the MR of hiring the worker is $2000
    2. The MC of hiring the worker is $1500
    3. The firm should hire the worker since MB>MC
    4. All the above

36. A firm is thinking of hiring an additional worker to their organization who they believe can increase total productivity by 100 units a week. The cost of hiring him or her is $1500 per week. If the price of each unit is $12,
    1. the MR of hiring the worker is $1500
    2. The MC of hiring the worker is $1200

1. 3. The firm should not hire the worker since MB<MC
   4. All the above

37. Marginal revenue
    1. Is the additional revenue incurred by selling one more unit
    2. Is the total revenue incurred by selling one more unit
    3. Is the total revenue incurred by selling all the firm’s output
    4. Is the difference between total revenue and total costs

Use the following table to answer questions 38 - 41:

# Units Produced                         Total Revenue                            Total Costs

0                                                       0                                                  200

1                                                     600                                               650

2                                                     780                                               710

3                                                     850                                               780

4                                                     890                                               870

5                                                     910                                               980

38. What is the marginal revenue of producing the fourth unit?
    1. 90
    2. 40
    3. 20

d) 180

39. What is the marginal cost of producing the third unit?
    1. 60
    2. 70
    3. 90

d) 110

40. How many units should the firm produce? In other words, at what level of output does marginal cost equal marginal revenue?
    1. 1
    2. 2
    3. 3
    4. 4

41. What is the level of profits when four units are produced? a) 40.

b) 70.

c) -30.

d) 20.

42. What is the average cost per unit for producing 3 units? a) 200

b) 260

c) 70

d) 110.

43. What is the difference between the average cost per unit for 5 units and the marginal cost of the 5^th unit?

a) 196

b) 86

c) 40.

d) 110.

44. The optimal amount of studying for the next exam is determined by comparing

1. 1. total benefit and the total cost of studying.
   2. marginal benefit and the total cost of studying.
   3. marginal benefit and the marginal cost of studying.
   4. total benefit and the total cost of studying.

45. Which of the following is an incorrect statement?
    1. If for an activity MR>MC, then do more of it
    2. An incentive compensation scheme that increases MR will increase effort
    3. Fixed fees have no effect on effort
    4. Average cost is relevant to an extent decision

46. At the current level of production, if the firm’s marginal costs exceeds marginal benefits, then
    1. The company should produce more
    2. The company is maximizing profit at this output
    3. The company is producing too much
    4. Not possible to determine

47. A company is producing 15,000 units. At this output level, marginal revenue is $22 and the marginal cost is $18. The firm sells each unit for $48 and average total cost is $40. What can we conclude from this information?
    1. The company is making a loss
    2. The company needs to cut production
    3. The company needs to increase production
    4. Not enough information is provided

48. A firm currently has 5 workers each paid $15 per hour. If it decides to hire a 6^th worker, the hourly wage increases to $18 for all workers. What is the marginal cost of hiring the 6^th worker?
    1. $3

b)   $18

c)   $15

d) $33

49. A firm currently has 5 workers each paid $15 per hour. If it decides to hire a 6^th worker, the hourly wage increases to $18 for all workers. The 6^th worker is expected to contribute to around $40 worth of output. Based on this information, the firm should
    1. Hire the 6^th worker since MR>MC
    2. Not hire the 6^th worker since MR>MC
    3. Not hire the workers since MR<MC
    4. Need more information