MANECON - Chapter 4 Extent Decisions (copy)

Average Cost (AC)

is total cost (fixed and variable) divided by total units produced.

Marginal cost (MC)

is the additional cost incurred by producing and selling one more unit.

Marginal revenue (MR)

is the additional revenue gained from selling one more unit.

Sell more

 if MR > MC

sell less

if MR < MC

maximizing profit

if MR = MC

marginal costs and marginal revenue

The relevant costs and benefits of an extent decision

Fixed fees

have no effects on effort

Average cost (AC)

is simply the total cost (TC) of production divided by the number of units produced (Q).  

Average cost (AC)

 often decrease as quantity increases due to presence of fixed costs (FC)

Marginal cost

is the additional cost to make and sell one additional unit of output (Q)

Marginal cost

 is often lower than average cost (due to fixed costs) but not always

Marginal revenue (MR)

is the additional revenue gained from producing and selling one more unit.

Cost Center

a division whose parent company rewards it for reducing the cost of producing a specified output

Extent Decision

a decision regarding how much or how many of a product to produce

Pay for performance

an example of a good incentive compensation scheme that reflects effort

c

When economists speak of marginal, they mean

a. opportunity

b. scarcity

c. incremental

d. unimportant

a/c ???

Managers undertake an investment only if

a. marginal benefits of the investment are greater than zero.

b. MCs of the investment are greater than marginal benefits of the investment.

c. marginal benefits are greater than MCs.

d. investment decisions do not depend on marginal analysis.

c??

A firm produces 500 units per week. It hires 20 full-time workers (40 hours/week) at an hourly wage of $15. Raw materials are ordered weekly, and they cost $10 for every unit produced. The weekly cost of the rent payment for the factory is $2,250, How do the overall costs break down?

a. Total variable cost is $17,000; total fixed cost is $2,250; and total cost is $19,250.

b. Total variable cost is $12,000; total fixed cost is $7,250; and total cost is $19,250.

c. Total variable cost is $5,000; total fixed cost is $14,250; and total cost is $19,250.

d. Total variable cost is $5,000; total fixed cost is $2,250; and total cost is $7,250.

Total costs increase from $1,500 to $1,800 when a firm increases output from 40 to 50 units. Which of the following is true if MC is constant?

a. FC = $100

b. FC = $200

c. FC = $300

d. FC = $400

A manager of a clothing firm is deciding whether to add another factory in addition to one already in production. The manager would compare.

a. the total benefits gained from the two factories to the total costs of running the two factories.

b. the incremental benefit expected from the second factory to the total costs of running the two factories.

c. the incremental benefit expected from the second factory to the cost of the second factory.

d. the total benefits gained from the two factories to the incremental costs of running the two factories.

c

A firm is thinking of hiring an additional worker to their organization who can increase total productivity by 100 units a week. The cost of hiring him is $1,500 per week. If the price of each unit is $12.

a. the MR of hiring the worker is $1,500.

b. the MC of hiring the worker is $1,200.

c. the firm should not hire the worker since MR < MC.

d. all of the above.

c

A retailer has to pay $9 per hour to hire 13 workers. If the retailer only needs to hire 12 workers, a wage rate of $7 per hour is sufficient. What is the MC of the 13th worker?

a. $117

b. $9

c. $33

d. $84

b

If a firm's AC is rising, then

a. MC is less than AC.

b. MC is rising.

c. MC is greater than AC.

d. the firm is making an economic profit.

c

A company is producing 15,000 units. At this output level, MR is $22, and the MC is $18. The firm sells each unit for $48 and average total cost is $40. What can we conclude from this information?

a. The company is making a loss.

b. The company needs to cut production.

c. The company needs to increase production.

d. Not enough information is provided.

a. ???

10. Food Fanatics caters meals where its cost of producing an extra meal is $25. Each of its meals sells for $20. At this rate, what should the company do?

a. Produce more meals and increase its profit.

b. Produce fewer meals and increase its profit.

c. Not change production.

d. None of the above.