Economics 101: Principles of Microeconomics Ch 4. Producers in Microeconomics

Short-Run Production

• production that can be completed given the fact that at least one factor of production is fixed

• firms consider short-run production to be the production necessary to fulfill current contracts

Diminishing Returns

too much added labor, or any other resource, can be bad for output

ABC Electronics has a current contract with XYZ Computers to manufacture 100,000 computer chips for them. Which of the following is the best descriptor for this production that ABC is under obligation to fulfill for XYZ?

1. Production suffering from diminishing returns

2. Current inventory production

3. Long-run production

4. Short-run production

Short-run production

What rule says that too much of a good thing is bad when it comes to increasing outputs?

1. Short-run production

2. Diminishing returns

3. Long-term production

4. Marginal demand

Diminishing returns

Describe what happens to the short-run production curve of a coffee shop that hires its second employee.

1. Output drops

2. Output remains steady

3. Output rises dramatically

4. Output rises slowly

Output rises dramatically

Which of the following is NOT a good definition or example of short-run production?

1. Production that happens next quarter

2. Production related to a firm's current contracts

3. Production that a firm can complete given certain variable inputs

4. Production that the firm can complete without capital upgrades to its factories

Production that happens next quarter

What happens to the short-run production curve when a typical coffee shop has 20 employees on one shift, and why does it happen?

1. Output increases slightly, because the rule of short-run production says that once you pass 15 employees, the output improvement is marginal.

2. Output triples, because the rule of short-run production says that output doubles, then triples, etc. for every 6 employees working.

3. Output is near 0, because there are too many employees working at once, which hinders production.

4. Output increases dramatically, because the more employees you have working, the greater your production.

Output is near 0, because there are too many employees working at once, which hinders production.

Theory of Production

allows firms to figure out how much of which resources they need to acquire

Total Product

total amount produced per a set of resources

Average Product

average cost per unit produced per set of resources

Marginal Product

cost for the very next unit to be produced in resources

Gary owns a business that manufactures ice cream cones. He uses a machine that produces 24 cones at a time. Paul placed an order of 220 cones, but later asked to add 5 more cones to his order. What expense will be required for Gary to manufacture the additional 5 cones?

1. Labor.

2. Machine.

3. Raw materials.

4. No additional cost.

No additional cost.

_____ is the amount of resources needed to make just one more of a given product.

1. Theoretical product

2. Average product

3. Additional product

4. Marginal product

Marginal product

Which factor is most important for expressing total product, but is not needed for working out the average product?

1. Labor

2. Raw material

3. Time

4. Temperature

Time

How is knowledge of the theory of production useful to a company?

1. They can predict their profits or losses.

2. They can determine how much of which resources they need to acquire.

3. They can increase the time that they will remain in operation.

4. They can determine how many new customers they will acquire after production.

They can determine how much of which resources they need to acquire.

_____ is the total amount produced per a set of resources.

1. Total product

2. Marginal product

3. Average product

4. Theoretical product

Total product

Fixed Costs

costs that are fixed whether one item is produced or whether a thousand are made

Variable Costs

change depending on how many items are produced

Caribbean Constructions is planning to expand a complex of resort condos in the Bahama Islands. Which of these is a fixed cost for their project?

1. windows for the new condos

2. concrete to build on the new site

3. paint for the new condos

4. land for the the new buildings

land for the the new buildings

Sandra is a veterinarian who is planning to start a new practice in Columbus, Ohio. Which of these is a variable cost of starting her business?

1. the purchase of technology such as diagnostic equipment and computers

2. the license to practice veterinary medicine in the state of Ohio

3. the purchase of land to build the clinic

4. medicines and supplies needed to treat patients and perform surgery

medicines and supplies needed to treat patients and perform surgery

Variable costs may rise sharply in all of the following situations, EXCEPT:

1. workers go on strike and labor becomes more expensive

2. a new factory must be built to keep up with demand

3. the renting price of manufacturing facilities increases

4. the cost of resources increases

the renting price of manufacturing facilities increases

Which business do you think would have the highest fixed cost?

1. a hot dog stand that sells jumbo dogs with all the fixings

2. a bakery that specializes in high end wedding cakes

3. a major motion picture studio that produces action adventure movies

4. a pop-up boutique that relies on social media for advertising

a major motion picture studio that produces action adventure movies

mixed costs

combine both fixed and variable costs

fixed costs

costs that stay the same regardless of production

variable costs

costs that change based on production

Mixed cost is a combination of _____.

1. variable and fixed costs

2. increasing and decreasing costs

3. variable and increasing costs

4. increasing and constant costs

variable and fixed costs

How is variable cost linked to the number of products a company produces?

1. As the number of products increases, the variable costs increase.

2. As the number of products increases, the variable costs decrease to a minimum and then remain unchanged.

3. As the number of products increases, the variable costs remain unchanged.

4. As the number of products decreases, the variable costs increase.

As the number of products increases, the variable costs increase.

Alpha Company Ltd is looking to lease a photocopier. The monthly lease for the photocopier is $65 and an additional charge of $0.05 per copy. Calculate the lease cost of the photocopier during the month of July if the expected number of copies is 50,000.

1. $2500

2. $565

3. $2565

4. $575

$2565

Identify a fixed cost and a variable cost that are involved in the operation of an automobile.

1. Fixed cost: tires for the car; variable cost: gas

2. Fixed cost: gas; variable cost: car payment.

3. Fixed cost: car payment; variable cost: insurance payment.

4. Fixed cost: car payment; variable cost: gas

Fixed cost: car payment; variable cost: gas

What type of cost is the unchanging base cost that is paid every month when renting a machine?

1. Fixed

2. Constant

3. Mixed

4. Variable

Fixed

unit cost

the amount of money it takes to produce one unit

fixed costs

all costs that go into the making of a product that do not vary with the number of units produced

direct labor costs

the wages paid to workers directly involved with making the product

direct material costs

materials purchased and used in making the product

What is the unit cost?

1. The total cost to produce a product divided by the number of units produced.

2. The fixed costs plus variable costs, divided by half of the units produced.

3. The cost that the customer will pay for a product in a retail store.

4. The sum of all the variable costs divided by the number of units produced.

The total cost to produce a product divided by the number of units produced.

Which of the following is a variable cost?

1. The price of gas.

2. Wages paid to the management team overseeing the production of popcorn makers.

3. A utility bill for a sales office.

4. The amount paid for steel used in making a car.

The amount paid for steel used in making a car.

PEN Company Ltd is a company that produces pens. The unit cost of a pen in January was $1 if 50,000 units are produced, with direct labor and direct material costs are $15,000 and $16,000 respectively.

Calculate the unit cost of a pen in February with an order totaling 4000 units if direct labor costs and direct material costs are $6,000 and $4,000 respectively.

1. $7.25

2. $1.00

3. $0.08

4. $4.75

$7.25

Which of the following is a fixed cost?

1. Wages paid to a laborer producing stair spindles.

2. Direct material costs.

3. Costs arrived at by colluding with competitors.

4. Rent paid to a landlord.

Rent paid to a landlord.

Company Z produces 10,000 units in a year. It has fixed costs of $50,000, direct labor costs of $50,000, and direct material costs of $100,000. What is the unit cost for Company Z's product?

1. $20/unit

2. $10/unit

3. $30/unit

4. $50/unit

$20/unit

Law of Diminishing Marginal Returns

the utility of a given item can decrease as more of it is provided

Marginal Return Curve

the given utility for a good

What is a util?

1. An imaginary measure of utility.

2. The base unit of economics.

3. A unit used to measure scarcity.

4. A curve that measures utility.

An imaginary measure of utility.

The law of diminishing marginal returns is best summed up by which of the following statements?

1. You cannot have too much of a good thing.

2. Too much of a good thing is bad.

3. You cannot measure a good thing.

4. You cannot have it all.

Too much of a good thing is bad.

When would a price go below 0?

1. If the consumer pays the producer to stop.

2. The price cannot go below 0.

3. If there is a lack of inventory.

4. If the producer pays the consumer to stop.

If the consumer pays the producer to stop.

According to the law of diminishing marginal returns, at which point is the price for a good the highest?

1. The second last unit consumed.

2. The first unit consumed.

3. The last unit consumed.

4. The hundredth unit consumed.

The first unit consumed.

At which point should a producer stop producing goods, according to the law of diminishing marginal returns?

1. The last unit that the consumer will pay for.

2. The first unit that the consumer will pay for.

3. The last unit that the consumer pays for that is sold above the manufacture price.

4. The first unit that the consumer pays for that is sold below the manufacture price.

The last unit that the consumer pays for that is sold above the manufacture price.

Fixed Costs

costs that do not change with the quantity produced

Variable Costs

dependent on the amount of goods produced

Total Cost

adding the variable cost of all units produced with the fixed cost of business

total cost curve

show the relationship between variable costs, total costs, and fixed costs

Which of these is a straight horizontal line on a total cost curve?

1. Variable Cost

2. Fixed Cost

3. Average cost

4. Total cost

Fixed Cost

Which of these is the total cost?

1. Average cost plus variable cost

2. Fixed cost plus average cost

3. Variable cost plus fixed cost

4. Marginal cost plus average cost

Variable cost plus fixed cost

Which of these is a variable cost?

1. Ice cream cones

2. Health inspection fee

3. Manager's salary

4. Business license

Ice cream cones

XYZ Bicycles is trying to make production decisions for the future. Currently, XYZ is able to sell the next bicycle they will produce for more than it costs them to make. Should XYZ increase production, and why?

1. No, they should keep production the same, because they need to ensure this trend will continue.

2. Yes, they should increase production, because the sales price is greater than the marginal cost of production for the bicycle.

3. No, they should decrease production, because there is a certain profit threshold that must be met.

4. Yes, they should increase production, because the sales would allow them to open more stores to overtake their competition.

Yes, they should increase production, because the sales price is greater than the marginal cost of production for the bicycle.

Why does the variable cost curve rise quickly at first?

1. Because the initial start-up costs in business are high. Going from zero to functioning factory will take upgrades.

2. Because variable costs rise in equal proportion to fixed costs.

3. Because the costs of production are always highest at the beginning, and never rise at the same rate in the future.

4. Because the variable costs are always high, they don't ever level out.

Because the initial start-up costs in business are high. Going from zero to functioning factory will take upgrades.

Short-Run Costs

costs that come as a result of fulfilling a current contract

Total Cost

calculating all the costs of a given product

Average Cost

found by dividing the total cost by the number of products that were made as a result of the purchased inputs

Why is knowing the average cost beneficial to the manager?

1. Because it will assist them in pricing the product.

2. Because they will know how much inventory is left.

3. Because they will know if the company can expand its operations.

4. Because they will know how many products have been sold.

Because it will assist them in pricing the product.

Why is knowing total cost helpful to a manager?

1. It can help them determine how much it costs to produce an additional unit of product.

2. It can help them determine whether the products are competitive.

3. It can help them determine the cost of expansion.

4. It can help them determine the price.

It can help them determine the cost of expansion.

A decrease in average cost by 50% will result in an increase in profits of 50%, assuming that the decreased cost also increases efficiency. Why is this statement FALSE?

1. It will have no impact on efficiency, because the increase in profits is offset by the decrease in costs.

2. Profits will increase by less than 50 percent.

3. Profits will increase by 100 percent.

4. Profits will increase by more than 50 percent.

Profits will increase by more than 50 percent.

What is total cost?

1. The cost to make just one more of a given good.

2. The cost per unit of a given good.

3. The total cost of resources for a given good's production.

4. The average cost of production.

The total cost of resources for a given good's production.

What is average cost?

1. Total cost divided by the number of products that were made.

2. The average number of units produced per cost.

3. The cost of producing one additional unit of a particular product.

4. The total cost of resources for all units produced.

Total cost divided by the number of products that were made.

Marginal cost

the cost to produce one more

Total Cost

calculated by totaling up the cost of everything that went into producing the goods in question

Average Cost

the average cost per unit manufactured the total cost of manufacturing everything, divided by the total number of units manufactured

Sarah owns a factory that produces tin cans. A company puts in an order for twice as many cans as usual, but only for one month. Why might Sarah turn down this order?

1. Accommodating this order might raise her marginal costs beyond the point where the deal is profitable.

2. To produce more cans, she'll need to raise wages in the factory, which will raise both her total and average costs.

3. To produce more cans, she'll need to buy more materials, which will raise her average costs.

4. To produce more cans, she'll need to buy more materials, which will raise her total costs.

Accommodating this order might raise her marginal costs beyond the point where the deal is profitable.

If a company is trying to expand operations, which of the following matters most?

1. Cumulative cost

2. Average cost

3. Marginal cost

4. Total cost

Marginal cost

If a company is trying to determine a fair price for its goods, which of the following matters the most?

1. Average cost

2. Total cost

3. Marginal cost

4. Cumulative cost

Average cost

If a company is trying to determine whether or not to enter a new sector, which of the following is most important?

1. Total cost

2. Average cost

3. Cumulative cost

4. Marginal cost

Total cost

All of the following affect marginal cost, EXCEPT _____.

1. potential need for a new factory

2. additional resources

3. additional labor

4. rent on the current factory lease

rent on the current factory lease

Product Curve

show the relationship between additional inputs, such as labor or capital, and how much of a good is actually produced

Cost Curve

shows the relationship between the cost of each extra input and it’s impact on production

What is the shape of a product curve?

1. A straight line

2. The letter C

3. Right side up bowl

4. Upside down bowl

Upside down bowl

If you were going to sum up the main lesson of product curves, how would you best explain it?

1. More resources always hinders the organic growth of a business

2. The more inputs in a business, the higher the profits

3. If you put too many inputs into a business, it has the potential to hinder production

4. More labor is always good for a business

If you put too many inputs into a business, it has the potential to hinder production

What does a product curve demonstrate?

1. The relationship between resources and cost

2. How many products are produced in a given time period

3. The relationship between resources and production

4. The relationship between cost and production

The relationship between resources and production

What is the shape of a cost curve?

1. Right side up bowl

2. The letter C

3. A straight line

4. Upside down bowl

Right side up bowl

Which of these does the cost curve demonstrate?

1. The relationship between quantity produced and cost of resources

2. The cost of entering a market

3. The relationship between quantity and production

4. The potential profits of entering a market

The relationship between quantity produced and cost of resources

Short-Run Production

the current contracts

Long-Run Production

• the research and development stage

• concerns itself with business planning beyond current contracts

• long-run production concerns itself only with variable costs

Innovation

• vital to companies looking at Long-Run Production decisions

• does not always have to take the role of a new technology or method

• focuses on a way of remaining profitable in the future

The Kikkoman company has been successful in business since the 17th Century due to which of the following?

1. by focusing its goals on quality products that remain true to the brand that was built many years ago

2. pursuing long-run goals and expanding production to the types of products that would be profitable in the future

3. by focusing on making one product better than any other company

4. by combining the work of eight families to build a power brand

pursuing long-run goals and expanding production to the types of products that would be profitable in the future

What is the primary focus of innovation?

1. staying ahead of one's competitors

2. remaining profitable in the future

3. creating new technologies or methods

4. increasing production efficiency

remaining profitable in the future

Long-run production is best defined as which of the following?

1. a production strategy requiring companies to reinvent themselves with each new technology

2. a production strategy focusing on business planning beyond current contracts

3. a focus in production planning that exhibits a laser-like focus on fulfilling current contracts to the utmost quality

4. production that continues at all times, even under the demands of an ongoing contract

a production strategy focusing on business planning beyond current contracts

Why are all costs associated with long-run production considered to be variable?

1. when looking to the future there is no way to predict how costs will change

2. fixed costs have an expiration date and are only calculated with short-run production

3. new contracts will never carry the same costs as those that are current

4. producers do not innovate, so there are no fixed costs

when looking to the future there is no way to predict how costs will change

Radio Shack is an example of a company doing which of the following?

1. focusing exclusively on current business contracts, or short-run production

2. spending too much revenue on research and development

3. providing cutting edge products through innovative selling techniques

4. positioning themselves to be profitable in the future using long-run strategies

focusing exclusively on current business contracts, or short-run production

short-run

• a time frame in which at least one factor of input is fixed, and cannot be changed

• more heavily focused on how to manufacture the output to satisfy the orders on the books for this month/quarter/year

long-run

• a situation where every factor is variable and can be changed

• focused more on how those inputs can be changed and rearranged to increase profits in the future

Short-Run Costs

how much in terms of resources that short-run production will take to produce

Variable Costs

costs that change per unit produced

Fixed Costs

costs incurred to enter the marketplace regardless of production or sales volume

What is a short-run cost?

1. A cost incurred in the next quarter.

2. A cost incurred in the next year.

3. A cost incurred while satisfying current contracts.

4. A cost incurred tomorrow.

A cost incurred while satisfying current contracts.

Transitioning from baking to catering is considered which of the following?

1. Medium-term.

2. An acquisition.

3. Short-run.

4. Long-run.

Long-run.

A contract to be completed in the next six months would be considered which of the following?

1. Part of short-run production.

2. Both short-run and long-run production.

3. Part of long-run production.

4. Neither short-run or long-run production.

Part of short-run production.

Accounting software for a bakery is:

1. Both a fixed and a variable cost.

2. A fixed cost.

3. A total cost.

4. A variable cost.

A fixed cost.

What is a long-run cost?

1. A cost incurred 12 months from now.

2. A cost pertaining to production following the fulfillment of current contracts.

3. A cost incurred ten years from now.

4. A cost pertaining to production following the fulfillment of contracts with purchase orders more than 12 months away.

A cost pertaining to production following the fulfillment of current contracts.

Economy of Scale

making sure that the scale of production is in line with the most profitable possible outcomes over the long term

When foreign automakers achieve economies of scale by positioning plants in the United States to avoid tariffs, which kind of costs are they focused on reducing?

1. Marginal costs

2. Opportunity costs

3. Fixed costs

4. Sunk costs

Marginal costs

A state government offers tax breaks to companies to build factories in their state. If a company takes up this offer and builds a new factory in this state, what will they be reducing?

1. Marginal costs

2. Fixed costs

3. Tariffs

4. Economies of scale

Marginal costs

Which company attempted to reduce their fixed costs at the Rouge River plant and ended up with massive marginal costs?

1. Mercedes

2. Ford

3. Toyota

4. GM

Ford