ECO501 Tutorial 5

Activity 5.1 – Firm’s Economic Costs and Profit

Do the multiple choice and discussion questions below

Part A: Multiple Choice Questions

1) A firm's fundamental goal is

A) different for each firm.
B) to make a quality product.
C) to maximize profit.
D) to gain market share.
E) to decrease its employment of workers in order to cut its costs.

2) When an economist uses the term "cost" referring to a firm, the economist refers to the
A) price of the good to the consumer.
B) explicit cost of producing a good or service but not the implicit cost of producing a good or
service.
C) implicit cost of producing a good or service but not the explicit cost of producing a good or
service.
D) opportunity cost of producing a good or service, which includes both implicit and explicit cost.
E) cost that can be actually verified and measured.

3) From a firm's viewpoint, opportunity cost is the

A) best alternative use customers can find for the firm's output.
B) cost the firm must pay for the factors of production it employs to attract them from their best
alternative use.
C) accounting cost of resources.
D) price a firm can charge for its output.
E) cost of acquiring the opportunity to sell to its customers.

4) A cost incurred in the production of a good or service and for which the firm does not need to
make a direct monetary payment, is referred to as ________ cost.
A) a minimized
B) a maximized
C) an explicit
D) an implicit
E) an invisible

5) Economic depreciation is the

A) fall in value of the firm's capital, calculating using IRS rules.
B) opportunity cost of owning and using the firm's capital, measured as the change in market value.
C) decrease in the value of finished goods and services that are held in inventories prior to being sold.
D) term given to a fall in a company's stock price.
E) name given to how accountants calculate the depreciation of the company's capital.

6) The return to entrepreneurship is known as

A) economic profit.
B) normal profit.
C) opportunity revenue.
D) normal revenue.
E) explicit profit.

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 7) A firm's total revenue minus its total opportunity cost is called its
A) accounting profit.
B) normal profit.
C) economic profit.
D) abnormal profit.
E) entrepreneur's profit.

8) Jennifer owns a pig farm near Salina, Kansas. Last year she earned $39,000 in total revenue
while incurring $38,000 in explicit costs. She could have earned $27,000 as a teacher in
Salina. These are all her revenue and costs. Therefore Jennifer earned an
A) accounting profit of $1,000 but incurred an economic loss of $26,000.
B) accounting profit of $1,000 but incurred an economic loss of $65,000.
C) accounting profit of $1,000 but incurred an economic loss of $38,000.
D) economic profit of $1,000.
E) None of the above answers is correct.

9) Suppose a firm's total revenue is $1,000,000. The firm has incurred explicit costs of
$750,000. There is also $50,000 of forgone wages by the owner, $10,000 of forgone interest
by the owner, $3,000 worth of economic depreciation, and $20,000 worth of normal profit.
What is the firm's economic profit?
A) $250,000
B) $200,000
C) $190,000
D) $167,000
E) $180,000

10) Bill is an economics professor who earns $37,000 teaching but decides to leave and fulfill his
dream of catering barbecues. During his year of barbecuing he earned total revenue of
$60,000. He spent $30,000 on food and supplies. He also paid his wife $10,000 to help serve
food. The normal profit for an entrepreneur running a barbecue business is $3,000. Bill also
rented an industrial grill/fry truck for $12,000. Bill had an economic
A) profit of $20,000.
B) loss of -$32,000.
C) loss of -$42,000.
D) profit of $28,000.
E) profit of zero.

Part B – Discussion Questions

1) Jake opens a pig farm in Idaho. To start his farm, he uses his entire $50,000 of savings from his
savings account. The bank was paying him $2,500 interest on his saving. Explain why the $2,500 is
one of Jake's costs.

2) What is the difference between a normal profit and an economic profit?

3) Jessica is a young doctor who has just started her own practice. Her previous position paid her
$80,000 a year. For office space, she uses a building which she owns and which she has rented in the
past for $40,000 a year. Her total revenue from her new practice is $250,000. She pays $50,000 to
other firms for materials and supplies, and she pays $40,000 in wages to her office nurse. Assume that
Jessica's building and equipment do not depreciate and that her normal profit is $20,000.
a. Which of Jessica's costs are explicit costs and what is their total?
b. Which of Jessica's costs are implicit costs and what is their total?
c. What is the opportunity cost of all factors of production employed by Jessica?

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d. What is Jessica's economic profit?

Activity 5.2 – Firm’s Factors of Production in the Short Run

Do the multiple choice and discussion questions below

Part A - Multiple Choice Questions

1) To produce more output in the short run, a firm must employ more of
A) all its resources.
B) its fixed resources.
C) its variable resources.
D) the least costly resources regardless of whether they are fixed or variable.
E) Firms cannot produce more output in the short run.

2) In the long run, the firm ________ change the number of workers it employs and ________
change the size of its plant.
A) can; can
B) can; cannot
C) cannot; can
D) cannot; cannot
E) In order to answer the question, more information is needed about how long the long run is.

3) The marginal product of labor is

A) total product divided by labor.
B) the change in total product divided by the increase in labor.
C) a measure of labor.
D) output that does not meet quality specifications.
E) total product minus the quantity of labor.

4) The figure shows the total product curve for the Fruit Bowl food truck. When labor increases
from 1 worker to 2 workers, total product increases to ________ meals and marginal product
equals ________ bowls.
A) 10; 5
B) 5; 10
C) 2; 2
D) 10; 2
E) 2; 5

5) The figure shows the total product curve for the Fruit Bowl food truck. If the food truck
increases production from 10 to 17 meals per hour, the marginal product is in the range where
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 it ________ and the marginal product is ________ the average product.
A) increases; greater than
B) increases; less than
C) decreases; greater than
D) increases; is equal to
E) does not change; is equal to

6) The figure shows the total product curve for the Fruit Bowl food truck. If production
increases from 19 to 20 meals per hour, the marginal product is in the range where it
________ and the marginal product ________ the average product.
A) decreases; is greater than
B) increases; is less than
C) increases; is greater than
D) reaches a maximum; equals
E) decreases; is less than

7) The figure shows the total product curve for the Fruit Bowl food truck. As the food truck
hires ________ workers, the marginal product(s) ________.
A) up to 3; are increasing
B) up to 3; are decreasing
C) between 3 and 5; are increasing
D) between 3 and 5; equal to the average product
E) over 4; are greater than the average product

8) Decreasing marginal returns occur in the short run as more labor is hired to work in a fixed
sized plant because
A) less efficient and less productive workers are hired.
B) adding more workers exhausts the possible gains from specialization.
C) the entrepreneur does not know how to manage more workers.
D) each worker will produce more than the worker previously hired.
E) the plant becomes less specialized.

9) The average product is the greatest in the short run when the
A) total product is maximized.
B) marginal product is equal to zero.
C) marginal product is maximized.
D) marginal product is equal to the average product.
E) marginal product is greater than the average product.

10) Which of the following is correct?

A) The short run for a firm can be longer than the long run for the same firm.
B) The short run is the same for all firms.
C) The long run is the time frame in which the quantities of all resources can be varied.
D) The long run is the time frame in which all resources are fixed.
E) The long run does not exist for some firms.

Part B – Discussion Questions

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 1. What resources can a firm change in the short run? In the long run?
2. What is the difference between decreasing marginal returns and negative marginal returns?

3. The above table has the total product schedule for Jesse's Lawn Service.
a. In the figure, label the axes and then graph the total product curve.

b. Find the average product and marginal product for the different amounts of employment.

Activity 5.3 – Firm’s Cost of Production in the Short Run

Do the multiple choice and discussion questions below

Part A - Multiple Choice Questions

1) In the short run, a firm cannot change the amount of capital it uses. Therefore the cost of
capital is a
A) short-run cost.
B) variable cost.
C) productivity cost.
D) fixed cost.
E) marginal cost.x

2) If a firm does not produce any output, its

A) total fixed cost must be zero.
B) economic profit must be positive.
C) total variable cost must be zero.
D) total costs must be zero.
E) marginal cost must be zero.

3) The total variable cost curve ________ because ________ as output increases.
A) slopes upward; variable cost increases

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B) slopes upward; marginal cost increases
C) slopes downward; variable cost increases
D) slopes downward; marginal cost increases
E) is horizontal; fixed cost does not change

4) As a typical firm increases its output, its marginal cost

A) is constant.
B) decreases at first and then increases.
C) increases at first and then decreases.
D) decreases.
E) is negative at first and then positive.

Labor Total fixedTotal variableTotal cost

Output (bikes)
(workers) costs (dollars) cost (dollars) (dollars)
0 0 200
1 20 100
2 50
3 60
4 64
5) The table above gives costs at Jan's Bike Shop. Unfortunately, Jan's record keeping has been
spotty. Each worker is paid $100 a day. Labor costs are the only variable costs of production.
What is the total cost of producing 50 bikes?
A) $100
B) $200
C) $300
D) $400
E) $500

6) The table above gives costs at Jan's Bike Shop. Unfortunately, Jan's record keeping has been
spotty. Each worker is paid $100 a day. Labor costs are the only variable costs of production.
What is the total fixed cost of producing 64 bikes?
A) $200
B) $300
C) $400
D) $500
E) $600

7) The table above gives costs at Jan's Bike Shop. Unfortunately, Jan's record keeping has been
spotty. Each worker is paid $100 a day. Labor costs are the only variable costs of production.
What is the total variable cost of producing 60 bikes?
A) $200
B) $300
C) $400
D) $500
E) None of the above answers are correct.

Total cost
Labor (workers) Output (frijoles)
(dollars)
0 0 1,000
5 1,000 3,000
10 3,000 5,000

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15 4,000 7,000
20 4,500 9,000

8) The above table gives some production and cost information for Flaming Fernando's, a restaurant
that sells Fiery Frijoles. What is the total fixed cost of producing 4,500 frijoles?
A) $1,000
B) $8,000
C) $9,000
D) $2,000
E) More information is needed to determine the answer.

9) The above table gives some production and cost information for Flaming Fernando's, a restaurant
that sells Fiery Frijoles. Between what two levels of output does the marginal cost of producing Fiery
Frijoles first begin to rise?
A) 0 and 1,000
B) 1,000 and 3,000
C) 3,000 and 4,000
D) 4,000 and 4,500
E) None of the above answers is correct.

10) The above table gives some production and cost information for Flaming Fernando's, a restaurant
that sells Fiery Frijoles. What is the average variable cost of producing 1,000 frijoles?
A) $1
B) $2
C) $3
D) $3,000
E) More information is needed to determine the answer.

11) The above table gives some production and cost information for Flaming Fernando's, a restaurant
that sells Fiery Frijoles. What is the average total cost of producing 4,500 frijoles?
A) $2
B) $225
C) $9,000
D) $8,000
E) More information is needed to determine the answer.

12) The production and cost information provided in the table above for Flaming Fernando's, a
restaurant that sells Fiery Frijoles, is for the
A) short run because there are no variable costs.
B) short run because there is a fixed cost.
C) long run because there are no variable costs.
D) long run because there are no fixed costs.
E) short run AND long run because the total cost increases as production increases.

13) In a graph of a typical firm's AFC, ATC, and AVC curves, the
A) AVC curve lies above the ATC curve.
B) ATC curve lies below the AFC curve.
C) distance between the ATC curve and the AVC curve equals the AFC.
D) distance between the AVC curve and the AFC curve equals the ATC.
E) AVC curve crosses the MC curve at the point where the MC is at its minimum.

14) As we observe the cost curves graph, we see that the

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A) MC curve intersects the ATC curve at its maximum.
B) MC curve cannot be U-shaped.
C) ATC curve always has a negative slope.
D) MC curve intersects the AVC curve and ATC curve at their minimums.
E) MC constantly falls as output increases.

15) In a figure showing the average total cost curve and the average variable cost curve, the vertical
distance between the two curves is equal to the
A) marginal cost.
B) average fixed cost.
C) total fixed cost.
D) total variable cost.
E) average marginal cost.

16) When the marginal product is increasing as the quantity increases, then as the quantity increases
the
A) average product is decreasing.
B) marginal cost is decreasing.
C) total cost is decreasing.
D) total product is decreasing.
E) fixed cost is increasing.

17) An increase in the price of labor (a variable resource) shifts

A) all cost curves upward.
B) the variable cost curves upward but leaves the fixed cost curves unchanged.
C) the fixed cost curves upward but leaves the variable cost curves unchanged.
D) the marginal cost curve rightward.
E) none of the cost curves.

18) The graph shows the total cost for Phil's Phone Repair. The average total cost to repair ________
phones is ________.
A) 5; $24.88

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B) 5; $21.33
C) 5; $6.80
D) 4; $6.33
E) 4; $24.88

19) The graph shows the total cost curve for Phil's Phone Repair. The total fixed cost of repairing
________ phones is ________.
A) 5; $90
B) 6; $3
C) 5; $128
D) 5; $24.88
E) More information is needed to answer the question.

20) If total fixed cost increases, which of the following will NOT change?
A) total cost
B) average fixed cost
C) marginal cost
D) average total cost
E) ALL costs increase when total fixed cost increases.

Part B – Discussion Questions

1. Jake is a corn farmer in Nebraska. He rents his land on a long-term lease for $250,000 a year.
He pays his farm hands $128,000 a year. Is his rent a fixed cost or a variable cost? Are the
wages he pays his workers a fixed cost or a variable cost? Briefly explain your answers.

2. "In the short run, even when output is zero, the firm still has some variable costs it must pay."
Is the statement correct or incorrect? Briefly explain your answer.

3. Downsizing is the practice of laying off workers in an attempt to decrease average total cost.
Can laying off workers decrease average total cost? Is it possible for the firm to downsize and
have its average total cost increase? Explain your answer.

4. What is the relationship between the marginal product of labor and the marginal cost?

5. The average total cost curve is U-shaped. At the quantity of output where average total cost is
at its minimum, is the marginal cost curve above the average total cost curve, below the
average total cost curve, or intersecting the average total cost curve?

6. Explain how new technologies, which increase productivity, affect the average variable cost,
average total cost, and marginal cost curves.

7. This month, the local widget factory produced 100 widgets. The total variable cost of
production was $500 and the average total cost of production was $8.
a. What is the total cost?
b. What is the total fixed cost?
c. What is the average fixed cost?
d. What is the average variable cost?

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8. The above table gives the total cost schedule for oil changes at the local Jiffy Lube.
a. What is Jiffy Lube's total fixed cost?
b. What is the total variable cost of 2 oil changes?
c. What is the average variable cost of 4 oil changes?
d. What is the average fixed cost of 2 oil changes?
e. What is the marginal cost of the 3rd oil change?

9. Suppose the local newspaper hires students to fold and bag newspapers for delivery and pays them
$20 per shift. Five students can fold and bag 300 newspapers per shift. The fourth student added 50
newspapers to total output. The cost of the capital the firm uses is fixed at $50 per shift.
a. Is the newspaper operating in the long run or short run? Why?
b. What is the average product of 5 students?
c. Calculate the total fixed cost, total variable cost, and total costs of folding and
bagging 300 newspapers.
d. Calculate the average fixed cost, average variable cost, and average total costs of
folding and bagging 300 newspapers.
e. What is the marginal cost of one of the 50 newspapers folded and bagged by the
fourth student?

10. Acme produces rocket shoes for use by slow coyotes. Acme's total cost schedule is given in the
table below. Acme's total fixed cost is $12. Complete the table. (In the table, TFC is the total fixed
cost, TVC is the total variable cost, AFC is the average fixed cost, AVC is the average variable cost,
and ATC is the average total cost.)

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Activity 5.4 – Firm’s Factors of Production and Costs in the Long Run
Do the multiple choice and discussion questions below

Part A - Multiple Choice Questions

1) Which of the following statements is true?
A) In the long run, the average cost curve is always downward sloping.
B) In the long run, the quantities of all inputs are fixed.
C) In the long run, the firm's fixed costs are greater than its variable costs.
D) In the long run, all costs are variable costs.
E) In the long run, the total variable cost equals the total fixed cost.

2) In the long run,

A) all inputs can be varied.
B) all inputs are fixed.
C) some inputs are variable and other inputs are fixed.
D) output is fixed.
E) total variable cost cannot be changed.

3) When a firm's long-run average total cost falls as its output increases, the firm is experiencing
A) economies of scale.
B) diseconomies of scale.
C) constant returns to scale.
D) decreasing marginal returns.
E) decreasing cost of marginal returns.

4) The main source of economies of scale is

A) reductions in the price of factors of production.
B) greater specialization of both labor and capital.
C) increasing average costs.
D) decreasing marginal product.
E) the ability to hire less labor.

5) In the long run, if 1,000 units are produced at a cost of $8,000 and 1,200 units at a cost of $9,200,
then over this range of output there are
A) constant economies of scale.
B) constant returns to scale.
C) diseconomies of scale.
D) economies of scale.
E) constant diseconomies of scale.

6) A firm decreases its scale of operation and discovers that its long-run average costs decrease.
Which of the following does this indicate?
A) Labor's marginal product has increased.
B) Diseconomies of scale were absent in the larger plant.
C) The firm's scale initially was so large that it experienced diseconomies of scale.
D) The firm's scale initially was too small to experience economies of scale.
E) Its long-run marginal cost was smaller with the larger plant than with the smaller plant.

7) Diseconomies of scale is a result of

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A) mismanagement.
B) difficulties of coordinating and controlling a large enterprise.
C) specialization of labor, capital, and management.
D) technological progress.
E) larger fixed costs as the firm's production increases.

8) What does the long-run average cost curve show?

A) the interaction between average fixed cost and marginal cost
B) the lowest average cost to produce each output level in the long run
C) the distinction between long-run fixed and long-run variable costs
D) the lowest average marginal cost of producing each output level at any time
E) Answers A, B, and C are correct.

9) The portion of the long-run average cost curve in which economies of scale are experienced shows
that as output increases, the
A) average total cost decreases.
B) average total cost increases.
C) marginal cost increases.
D) marginal cost decreases.
E) average variable cost is constant and the average fixed cost decreases.

10) If a company triples its output and its average cost decreases, then the firm is definitely
experiencing
A) diseconomies of scale.
B) decreasing marginal returns.
C) increasing marginal returns.
D) economies of scale.
E) Both answers C and D are correct.

11) In the long run, constant returns to scale necessarily occur when the firm increases its production
and the firm's
A) total cost increases.
B) total cost does not change.
C) average total cost increases .
D) average total cost does not change.
E) production increases by more than does the firm's total cost.

12) A firm's long-run average cost curve shows the ________ average cost at which it is possible to
produce each output when the firm has had ________ time to change both its labor force and its plant.
A) highest; sufficient
B) lowest; sufficient
C) lowest; insufficient
D) highest; insufficient
E) average; sufficient

13 Economies of scale and diseconomies of scale explain

A) cost behavior in the short run.
B) profit maximization in the long run.
C) the U-shape of the long-run average cost curve.
D) the U-shape of the short-run average total cost curve.
E) the U-shape of the marginal cost curves.

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Part B – Discussion Questions

1. What is the long-run average cost curve? What are the three ranges of output and in what
order do they occur? Briefly define each of the three ranges
2. Are the short-run average total cost curve and the long-run average cost both U-shaped for the
same reasons? If so, carefully explain these reasons. If not, explain why each curve is U-
shaped.
3. Ayanna grows herbs. Last year she grew 2,000 pounds of herbs in a year while using 250
square feet of land and 1 worker. This year she doubled her land to 500 square feet, doubled
her workers to 2, and grew 4,500 pounds of herbs. She sells her rare, organic herbs for $50 a
pound. She pays her a worker $25,000 a year and rents her land for $100 per square foot for a
year. These are her only costs.
a. What was Ayanna's total cost last year and this year?
b. What was Ayanna's average total cost last year and this year?
c. Did Ayanna experience economies or diseconomies of scale?

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