Chapter 17 — Quiz

Multiple choice

Q1. Fixed costs are costs that: a) Change with the quantity of output b) Do not change with the quantity of output in the short run c) Are always zero d) Only apply to large firms

Q2. Average total cost (ATC) is: a) Total cost divided by the number of workers b) Total cost divided by the quantity of output c) Fixed cost plus variable cost d) Marginal cost times quantity

Q3. The ATC curve is U-shaped because: a) Fixed costs are constant b) At low output, AFC is high and being spread; at high output, AVC is rising due to diminishing returns c) Firms always produce at the minimum ATC d) The government regulates prices

Q4. Marginal cost is: a) The total cost of all units produced b) The average cost per unit c) The additional cost of producing one more unit d) The cost of the first unit

Q5. Diminishing returns means: a) Total output eventually falls to zero b) Holding some inputs fixed, adding more of a variable input eventually produces smaller increments of additional output c) All inputs produce less over time d) Fixed costs rise

Q6. MC crosses ATC: a) At ATC's maximum b) At ATC's minimum c) Never d) At the origin

Q7. A firm should shut down in the short run when: a) Price < ATC b) Price < AVC c) Price < AFC d) Price = MC

Q8. In the long run, a firm should exit the industry when: a) Price < AVC b) Price < ATC (including the opportunity cost of capital) c) The firm is large d) Fixed costs are high

Q9. Economies of scale occur when: a) ATC rises as output increases b) ATC falls as output increases (in the long run) c) MC rises d) The firm has no fixed costs

Q10. Sunk costs should: a) Always be considered in decisions b) Be ignored in forward-looking decisions because they cannot be recovered c) Be included in marginal cost calculations d) Be added to variable costs

Q11. Riverside Foods' optimal output is where: a) TC is minimized b) ATC is minimized c) MR = MC (as long as P ≥ AVC) d) Output is maximized

Q12. In the long run, all inputs are: a) Fixed b) Variable c) Sunk d) Free

Short answer

SA1. Distinguish fixed costs from variable costs with one example of each.

SA2. Why does the marginal cost curve eventually slope upward?

SA3. State the shutdown rule and explain why fixed costs are irrelevant to the shutdown decision.

SA4. What are economies of scale, and why do they exist?

SA5. "We've already spent $5 million on this project, so we have to finish it." What's wrong with this reasoning?

True / False

TF1. Average fixed cost rises as output increases. (True / False)

TF2. Marginal cost crosses average total cost at ATC's minimum. (True / False)

TF3. A firm should shut down whenever it's not making a profit. (True / False)

TF4. Diminishing returns means total output eventually falls. (True / False)

TF5. In the long run, there are no fixed costs. (True / False)

Selected answers in appendices/answers-to-selected.md.