Q: A bakery pays $$1,000 per month in rent (fixed cost) and 2 $$per loaf in ingredients and labor (variable cost). If the bakery produces 500 loaves in a month, what is its average variable cost (AVC)?

$$AVC = \frac{TVC}{Q} = \frac{2 \times 500}{500} = 2$$

Question 1

Which of the following best explains why the Average Fixed Cost (AFC) curve is always downward sloping and never reaches zero?

Accepted Answer

Because fixed costs are spread over an increasing number of output units, so $$AFC = \frac{TFC}{Q}$$ declines as $$Q$$ rises.

Question 2

A firm is producing 100 units of output. Its total fixed cost (TFC) is $$500, and its total variable cost (TVC) is 1$$,000. What is the firm's average total cost (ATC)?

Accepted Answer

$$ATC = \frac{TFC + TVC}{Q} = \frac{500 + 1,000}{100} = 15$$

Question 3

Which of the following statements about the relationship between marginal cost (MC) and average variable cost (AVC) is correct?

Accepted Answer

MC intersects AVC at AVC's minimum point.

Question 4

Suppose a firm’s wage rate is $20 and the marginal product of labor (MP_L) is 5. What is the marginal cost (MC) of producing one more unit of output?

Accepted Answer

$$MC = \frac{Wage\ Rate}{MP_L} = \frac{20}{5} = 4$$

Question 5

If a firm’s total cost (TC) is $$2,000 when producing 200 units and 2$$,100 when producing 220 units, what is the marginal cost (MC) of increasing output from 200 to 220 units?

Accepted Answer

$$MC = \frac{\Delta TC}{\Delta Q} = \frac{2,100 - 2,000}{220 - 200} = \frac{100}{20} = 5$$

Question 6

Which of the following best describes the law of diminishing returns as it relates to marginal cost (MC)?

Accepted Answer

As more variable inputs are added to fixed resources, each additional unit of input contributes less output, causing marginal cost to rise.

Question 7

A bakery pays $$1,000 per month in rent (fixed cost) and 2 $$per loaf in ingredients and labor (variable cost). If the bakery produces 500 loaves in a month, what is its average variable cost (AVC)?

Accepted Answer

$$AVC = \frac{TVC}{Q} = \frac{2 	imes 500}{500} = 2$$

Question 8

Which of the following is NOT a characteristic of fixed costs in the short run?

Accepted Answer

They can be avoided by shutting down production in the short run.

Question 9

If the total fixed cost (TFC) is $600 and the firm produces 300 units, what is the average fixed cost (AFC)?

Accepted Answer

$$AFC = \frac{TFC}{Q} = \frac{600}{300} = 2$$

Question 10

Which of the following best explains why short-run cost curves (MC, AVC, ATC) are typically U-shaped?

Accepted Answer

Because of the law of diminishing returns: costs fall at first due to increasing returns, then rise as diminishing returns set in.

Question 11

A firm’s total cost (TC) is given by $$TC = 500 + 10Q + Q^2$. What is the marginal cost (MC) function?

Accepted Answer

$$MC = \frac{dTC}{dQ} = 10 + 2Q$$

Question 12

If a firm’s average total cost (ATC) is $$12, average variable cost (AVC) is 8$$, and output (Q) is 50 units, what is the total fixed cost (TFC)?

Accepted Answer

$$TFC = (ATC - AVC) 	imes Q = (12 - 8) 	imes 50 = 200$$

Question 13

Which of the following is an example of an explicit cost for a firm?

Accepted Answer

The salary paid to a manager.

Question 14

Suppose a firm’s marginal cost (MC) is below its average total cost (ATC) at a certain output level. What will happen to ATC if the firm increases output?

Accepted Answer

ATC will decrease.

Question 15

Which of the following best describes the relationship between total variable cost (TVC) and marginal cost (MC)?

Accepted Answer

The slope of the TVC curve at any output level is equal to MC.

Question 16

A firm is considering hiring an additional worker. The worker’s wage is $50 per day, and the marginal product of labor (MP_L) is 10 units per day. What is the marginal cost (MC) per unit of output from hiring this worker?

Accepted Answer

$$MC = \frac{Wage}{MP_L} = \frac{50}{10} = 5$$

Question 17

Which of the following is true about the behavior of the average total cost (ATC) curve as output increases?

Accepted Answer

ATC decreases at first, reaches a minimum, and then increases due to rising variable costs.

Question 18

If a firm’s total fixed cost (TFC) is $$400 and its total variable cost (TVC) is 1$$,200 at an output of 200 units, what is the average total cost (ATC)?

Accepted Answer

$$ATC = \frac{TFC + TVC}{Q} = \frac{400 + 1,200}{200} = 8$$

Question 19

Which of the following best describes economic cost?

Accepted Answer

Economic cost includes both explicit costs and opportunity costs.

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