Question 1

A firm is producing 500 units of output, incurring a total cost of $$700,000 and total fixed cost of 100$$,000. What is the average variable cost (AVC)?

$$AVC = \frac{TC - TFC}{Q}$$

Accepted Answer

$$200$$

Question 2

Suppose a production function for a firm takes the following algebraic form: $$Q = 0.5 \cdot K L - 40L$$, where $$Q is $$the output of paintbrushes per week. If the firm is operating with $$K = 100$$ and $$L = 30,000$$, what is the output of paintbrushes per week?

$$Q = 0.5 \cdot K L - 40L$$

Accepted Answer

$$3,000,000$$

Question 3

Which of the following is part of a firm's financial capital, as distinct from its real capital?

Accepted Answer

A $500,000 balance in a bank account

Question 4

A firm’s short-run cost curves, as conventionally drawn, show that:

Accepted Answer

ATC and AVC curves intersect the MC curve at their minimum points.

Question 5

Suppose a firm with a production function $$Q = 5KL - 0.01K^2$L^2 is $$operating with $$K = 8$$ and $$L = 10. $$What is the output of sweaters per day?

$$Q = 5KL - 0.01K^2$L^2$$

Accepted Answer

$$140$$ sweaters per day

Question 6

Suppose a café with two espresso machines and one barista is very busy and customers are lined up. The one barista can produce 40 coffee products per hour. The owner hires a second barista and total output increases to 70 units per hour. A third barista is hired and total product increases to 85 units per hour. In terms of labour, this firm is experiencing:

Accepted Answer

Diminishing marginal returns.

Question 7

Which of the following statements about a corporation are true?
1) It is an entity separate from the individuals who own it.
2) It is legally obliged to distribute all profits to shareholders.
3) It can incur debt that is an obligation of the corporation but not of its individual owners.

Accepted Answer

1 and 3 only

Question 8

The equation $$Q = 5KL - 0.01K^2$L^2$ is an example of:

Accepted Answer

A production function.

Question 9

A firm’s capacity is defined as the level of output where:

Accepted Answer

The upper limit on what can be produced is reached.

Question 10

If a firm’s marginal cost (MC) curve is below its average total cost (ATC) curve, what will happen to ATC as output increases?

Accepted Answer

ATC will decrease.

Question 11

Which of the following is an example of an explicit cost for a family-owned catering business?

Accepted Answer

Wages and salaries paid to employees.

Question 12

A limited partnership differs from an ordinary partnership by:

Accepted Answer

Including some partners whose liability is restricted to the amount that they invested in the firm.

Question 13

Economists use the notation $$Q = f(L, K) to $$describe:

Accepted Answer

The functional relationship between the inputs that a firm uses and the outputs that it produces.

Question 14

Suppose a firm’s total fixed cost is $$200$$ and its total variable cost for producing $$20$$ units is $$200. $$What is the average variable cost (AVC) for producing $$20$$ units?

$$AVC = \frac{TVC}{Q}$$

Accepted Answer

$$10$$

Question 15

In the cost curves diagram, which curve typically represents the average fixed cost (AFC) curve?

Accepted Answer

Curve A

Question 16

If a firm’s total revenue is $$500,000$$ and its explicit costs are $$200,000$$, what is its accounting profit?

$$	ext{Accounting Profit} = 	ext{Total Revenue} - 	ext{Explicit Costs}$$

Accepted Answer

$$300,000$$

Question 17

Which of the following is NOT a method by which a corporation can raise funds?

Accepted Answer

Making extra dividend payments.

Question 18

The relationship between factors of production used in the production process and the resulting output is called a:

Accepted Answer

Production function.

Question 19

If the wage per unit of labour is $$25$$ and the cost of capital is $$100$$, what is the total variable cost (TVC) of producing $$305$$ units of output, given that $$5$$ units of labour are used?

$$TVC = 	ext{Wage} 	imes 	ext{Labour}$$

Accepted Answer

Microeconomics Study Guide weekly assignment 6: Theory of the Firm, Costs, and Production

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