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The Firm, Profit, and the Costs of Production Review Questions for AP Economics

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By — McGraw-Hill Professional
Updated on Mar 2, 2011

The study guides for these review questions can be found at:

Questions

  1. Which of the following is most likely an example of production inputs that can be adjusted in the long run, but not in the short run?
    1. Amount of wood used to make a desk.
    2. Number of pickles put on a sandwich.
    3. The size of a McDonald's kitchen.
    4. Number of teacher's assistants in local high schools.
    5. The amount of electricity consumed by a manufacturing plant.
  2. The Law of Diminishing Marginal Returns is responsible for
    1. AVC that first rises, but eventually falls, as output increases.
    2. AFC that first rises, but eventually falls, as output increases.
    3. MP that first falls, but eventually rises, as output increases.
    4. MC that first falls, but eventually rises, as output increases.
    5. ATC that first rises, but eventually falls, as output increases.
  3. Which of the following cost and production relationships is inaccurately stated?
    1. AFC = AVC – ATC
    2. MC = ΔTVC/ΔQ
    3. TVC = TC – TFC
    4. APL = TPL/L
    5. MC = w/MPL
  4. If the per unit price of labor, a variable resource, increases, it causes which of the following?
    1. An upward shift in AFC.
    2. An upward shift in MPL.
    3. A downward shift in ATC.
    4. An upward shift in MC.
    5. A downward shift in AFC.
  5. Use the following figure to respond to questions 5 to 6.

    The Firm, Profit, and the Costs of Production Review Questions & Answers and Explanations

  6. The curves labeled W, X, Y, Z refer to which respective cost functions?
    1. MC, AVC, ATC, and AFC.
    2. MC, TC, TVC, and AFC.
    3. MC, ATC, AVC, and AFC.
    4. MC, ATC, AVC, and TFC.
    5. ATC, AVC, AFC, and MC.
  7. At the q3 level of output,
    1. AFC = $d2 – $d1.
    2. MC = $d2.
    3. TVC = $d2.
    4. ATC = $d3.
    5. AFC = $d3 – $d2.

Answers and Explanations

  1. C—The short run is a period of time too short to increase the plant size. All other choices involve decisions that could increase production almost immediately, with no change in the size of the facility. Increasing the size of a McDonald's kitchen takes quite some time and represents an increase in the total capacity of the kitchen to produce.
  2. D—The Law of Diminishing Marginal Returns says that MPL eventually falls as you add more labor to a fixed plant. This question tests you on the important connection between production and cost. Remember that we derived this "bridge" and found that MC = w/MPL. So when MPL is initially rising, MC is falling. Eventually when MPL is falling, MC is rising. Choices A, B and E are just flat wrong. All three average costs begin by falling. AFC continues to fall, but AVC and ATC eventually rise.
  3. A—AFC plus AVC equals ATC. If you do the subtraction, AFC = ATC – AVC, making choice A the only incorrect statement. If you have studied your production and cost relationships, you recognize that choices B, C, D and E are all stated correctly.
  4. D—When labor is more expensive, the MC of producing the good increases, so the MC curve shifts upward. The price of a variable input has increased, so easily rule out any reference to fixed costs. If anything, a higher wage shifts MPL downward.
  5. C—You must be familiar with the graphical representation of marginal and average cost functions.
  6. A—The vertical distance between ATC and AVC is AFC at any level of output.
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