UNIVERSITY OF TORONTO ECO100: INTRODUCTORY ECONOMICS

DEPARTMENT OF ECONOMICS ROBERT GAZZALE, PHD

PRACTICE PROBLEMS
FIRM COSTS

1. (Table: Output and Marginal Cost) Look at the table Output and Marginal Cost. After graduation you
achieve your dream of opening your own art shop that specializes in selling mud statues. After careful
study, you determine the information in the table. How many workers should you hire to minimize
your average variable costs?
A) two
B) three
C) four
D) five

2. The total cost curve gets steeper as output increases because of

A) increasing returns to the variable input.
B) decreasing returns to the variable input.
C) increases in fixed cost.
D) decreases in overhead costs.

3. (Table: Marie's Textbook Company) Look at the table Marie's Textbook Company. Marie has a small
publishing company that produces textbooks. She has fixed costs of $500 per month and hires workers
for $2,000 each per month. The table shows Marie's monthly production function. With as much
precision as possible, calculate the following:
a) total cost of production when four workers are employed
b) the output level that produces the lowest average total cost
c) the price that Marie must charge in order to break even on the production of 130 textbooks

201211 1 PRACTICE PROBLEMS: FIRM COSTS

UNIVERSITY OF TORONTO ECO100: INTRODUCTORY ECONOMICS
DEPARTMENT OF ECONOMICS ROBERT GAZZALE, PHD

4. (Table: Labor and Output) Look at the table Labor and Output. The marginal product of the fourth
worker is:
A) 9.
B) 36.
C) 10.
D) 6.

5. (Table: Labor and Output) In the table Labor and Output, the marginal product of the fifth worker is:
A) 8.
B) 4.
C) 3.
D) 40.

6. Some people use the phrase, “There are too many cooks in the kitchen” to describe any chaotic scene
where nothing gets done. Relate this phrase to short-run production functions.

7. When a fine caterer produces 30 catered meals, its marginal cost and average variable cost each equal $10.
Therefore, assuming normally shaped cost curves, at 29 meals:
A) its marginal cost is greater than $10 and its average variable cost is less than $10.
B) its marginal cost is less than $10 and its average variable cost is more than $10.
C) its marginal cost and its average variable cost are each greater than $10.
D) its marginal cost and its average variable cost are each equal to $10.

8. Which of the following curves is not affected by the existence of diminishing returns?
A) the average fixed cost curve
B) the average variable cost curve
C) the average total cost curve
D) the marginal cost curve

9. Which of the following statements is false?

A) When the marginal product of labor is upward sloping, the marginal cost curve is upward sloping.
B) The average fixed cost curve is downward sloping and approaches the horizontal axis.
C) The marginal cost curve intersects the average variable cost curve at the minimum of average variable
cost.
D) When the marginal cost curve is above the average cost curve, the average cost curve is upward sloping.

201211 2 PRACTICE PROBLEMS: FIRM COSTS

UNIVERSITY OF TORONTO ECO100: INTRODUCTORY ECONOMICS
DEPARTMENT OF ECONOMICS ROBERT GAZZALE, PHD

10. When Aishe's Bar-B-Que produces 10 pork sandwiches, the total cost is $5. When 11 pork sandwiches
are produced, the total cost rises to $6. From this we know that the marginal cost of the eleventh pork
sandwich:
A) is equal to the average cost of 11 pork sandwiches.
B) is greater than the average cost of 11 pork sandwiches.
C) is less than the average cost of 11 pork sandwiches.
D) can't be calculated without more information.

11. Marginal cost ________ over the range of increasing marginal returns and ________ over the range of
diminishing marginal returns.
A) increases; decreases
B) decreases; increases
C) is constant; decreases
D) increases; is constant

Figure: The Unknown Curve

12. (Figure: The Unknown Curve) Look at the figure The Unknown Curve. You are a cabinetmaker who
employs several workers to produce kitchen and bathroom cabinets. Your summer intern has created a
graph showing a relationship between the number of cabinetmakers you employ and the number of
cabinets produced. Unfortunately, your intern has failed to identify this curve. It is likely to be the
________ curve:
A) total cost
B) total product
C) marginal product
D) total variable cost

13. Suppose the marginal cost curve in the short run first decreases, then reaches a minimum, and then
increases. If we are at an output where marginal cost is decreasing, then:
A) marginal product must be increasing.
B) average variable cost must be decreasing.
C) average total cost must be increasing.
D) marginal product must be increasing and average variable cost must be decreasing.

14. The total product curve:

A) shows the relation between output and the quantity of a variable input for varying levels of the fixed
input.
B) will become flatter as output increases if there are diminishing returns to the variable input.
C) will be downward sloping if there are diminishing returns to the variable input.
D) will become horizontal when the marginal product of the variable input is constant.
201211 3 PRACTICE PROBLEMS: FIRM COSTS
UNIVERSITY OF TORONTO ECO100: INTRODUCTORY ECONOMICS
DEPARTMENT OF ECONOMICS ROBERT GAZZALE, PHD

15. A farm can produce 1,000 bushels of wheat per year with two workers and 1,300 bushels of wheat per
year with three workers. The marginal product of the third worker is:
A) 100 bushels.
B) 300 bushels.
C) 1,300 bushels.
D) 2,300 bushels.

16. In the short run, the average total cost curve slopes upward because of:
A) economies of scale.
B) diseconomies of scale.
C) increasing returns.
D) diminishing returns.

17. (Table: Production Function for Soybeans) The table shows a production function for soybeans.
Assume that the fixed input, capital, is 10 acres of land and a tractor, which have a combined cost of
$150 per day. The cost of labor is $100 per worker per day. The fixed cost of producing 25 bushels of
soybeans is:
A) $50
B) $100
C) $150
D) $250

18. (Table: Production Function for Soybeans) The table shows a production function for soybeans.
Assume that the fixed input, capital, is 10 acres of land and a tractor, which have a combined cost of
$150 per day. The cost of labor is $100 per worker per day. The variable cost of producing 25 bushels
of soybeans is:
A) $50
B) $100
C) $150
D) $250

19. (Table: Production Function for Soybeans) The table shows a production function for soybeans.
Assume that the fixed input, capital, is 10 acres of land and a tractor, which have a combined cost of
$150 per day. The cost of labor is $100 per worker per day. The total cost of producing 25 bushels of
soybeans is:
A) $50
B) $100
C) $150
D) $250

201211 4 PRACTICE PROBLEMS: FIRM COSTS

UNIVERSITY OF TORONTO ECO100: INTRODUCTORY ECONOMICS
DEPARTMENT OF ECONOMICS ROBERT GAZZALE, PHD

20. When a cherry orchard in Oregon adds a worker, the total cost of production increases by $24,000.
Adding the worker increases total cherry output by 600 pounds. Therefore, the marginal cost of the
last pound of cherries produced is:
A) $40.
B) $19.
C) $4,000.
D) $24,000.

Figure: The Total Product

21. (Figure: The Total Product) Look at the figure The Total Product. As labor is hired between L1 and L2,
the ________ is ________ and the ________ is ________.
A) total product; rising; marginal product; positive
B) marginal product; zero; total product; falling
C) total product; rising; marginal product; negative
D) total product; rising; marginal product; zero

22. (Figure: The Total Product) Look at the figure The Total Product. When L2 labor is hired, the total
product is at a ________and the marginal product of labor is________.
A) minimum; zero
B) maximum; zero
C) maximum; positive
D) minimum; falling but still positive

23. Austin's total fixed cost at the bakery is $3,600 a month. Austin employs 20 workers and pays each
worker $8 an hour. The marginal product of the twentieth worker is 12 iced cupcakes an hour. What is
the marginal cost of the last cupcake produced by the last worker Austin hired?
A) $0.26
B) $0.66
C) $3.81
D) $8

24. When Caroline's dress factory hires two workers, the total product is 50 dresses. When she hires three
workers, total product is 60, and when she hires four workers, total product is 65. The slope of the
marginal product curve when two to four workers are hired is
A) upward sloping.
B) horizontal.
C) vertical.
D) downward sloping.

201211 5 PRACTICE PROBLEMS: FIRM COSTS

UNIVERSITY OF TORONTO ECO100: INTRODUCTORY ECONOMICS
DEPARTMENT OF ECONOMICS ROBERT GAZZALE, PHD

25. Consider the statement, “When the marginal cost is rising, the average total cost must also be rising.” Is
this statement true or false? Explain your reasoning.

Figure: Short-Run Costs

26. (Figure: Short-Run Costs) Look at the figure Short-Run Costs. B is the ________ cost curve.
A) average total
B) average variable
C) marginal
D) total

27. (Figure: Short-Run Costs) Look at the figure Short-Run Costs. C is the ________ cost curve.
A) average total
B) total
C) marginal
D) average variable

28. (Figure: Short-Run Costs) Look at the figure Short-Run Costs. At seven units of output, average fixed
cost is approximately ________, and average variable cost is approximately ________.
A) $100; $100
B) $10; $135
C) $40; $100
D) $140; $140

29. (Figure: Short-Run Costs) Look at the figure Short-Run Costs. The vertical difference between curve B
and curve C at any quantity of output is:
A) marginal cost.
B) fixed cost.
C) average fixed cost.
D) average variable cost.

30. (Figure: Short-Run Costs) Look at the figure Short-Run Costs. A is the ________ cost curve.
A) average total
B) average variable
C) marginal
D) total

31. The long-run average total cost of producing 100 units of output is $4, while the long-run average cost
of producing 110 units of output is $4. These numbers suggest that the firm producing this output has:
A) economies of scale.
201211 6 PRACTICE PROBLEMS: FIRM COSTS
UNIVERSITY OF TORONTO ECO100: INTRODUCTORY ECONOMICS
DEPARTMENT OF ECONOMICS ROBERT GAZZALE, PHD

B) diseconomies of scale.
C) constant returns to scale.
D) diminishing returns.

32. Diminishing returns to an input occur:

A) when all inputs are fixed.
B) when some inputs are fixed and some are variable.
C) when all inputs are variable.
D) only in the long run.

33. (Table: Production of Bagels) Look at the table Production of Bagels. The marginal product of the third
worker is ________ bagels.
A) 9,000.
B) 10,000.
C) 12,000.
D) 15,000.

34. (Table: Production of Bagels) Look at the table Production of Bagels. Diminishing marginal returns
begin with the addition of the ________ worker.
A) third
B) fourth
C) fifth
D) sixth

35. (Table: Production of Bagels) Look at the table Production of Bagels. The marginal product of the fifth
worker is ________ bagels.
A) 5,000.
B) 9,000.
C) 10,000.
D) 12,000.

36. Oscar has negotiated a lease for his sporting goods store in which he is required to pay $2,500 per
month in rent. Oscar pays his staff $9 per hour to sell sporting goods and his monthly electricity bill
averages $700, depending on his total hours of operation. Oscar's fixed costs of production equal:
A) $2,500 per month.
B) $3,200 per month.
C) $9 per hour multiplied by total hours of work plus $700.
D) $9 per hour multiplied by total hours of work plus $3,200.

201211 7 PRACTICE PROBLEMS: FIRM COSTS

UNIVERSITY OF TORONTO ECO100: INTRODUCTORY ECONOMICS
DEPARTMENT OF ECONOMICS ROBERT GAZZALE, PHD

37. The average total cost of producing cell phones in a factory is $20 at the current output level of 100
units per week. If fixed cost is $1,200 per week:
A) average fixed cost is $20.
B) total cost is $3,200.
C) variable cost is $2,000.
D) average variable cost is $8.

38. The marginal product of labor is all of the following except:

A) the change in output resulting from a one-unit change in labor.
B) the slope of the total product curve.
C) positive at some levels of input and possibly negative at others.
D) total product divided by total labor.

39. (Table: Costs for Birthday Cakes) Annie has a bakery that specializes in birthday cakes, and her variable
costs of producing cakes are shown in the table Costs of Birthday Cakes. Assume that her fixed costs
are $10. The minimum average variable cost occurs at what output?
A) 2
B) 3
C) 4
D) 5

40. (Table: Costs for Birthday Cakes) Annie has a bakery that specializes in birthday cakes, and her variable
costs of producing cakes are shown in the table Costs of Birthday Cakes. Assume that her fixed costs
are $10. The minimum average total cost occurs at what output?
A) 6
B) 5
C) 3
D) 2

41. (Table: Costs for Birthday Cakes) Annie has a bakery that specializes in birthday cakes, and her variable
costs of producing cakes are shown in the table Costs of Birthday Cakes. Assume that her fixed costs
are $10. The point of diminishing returns occurs at what output?
A) 2
B) 3
C) 4
D) 5

42. When an increase in the firm's output reduces its long-run average total cost, it undergoes:
A) increasing returns to scale.
B) decreasing returns to scale.
C) constant returns to scale.
D) variable returns to scale.
201211 8 PRACTICE PROBLEMS: FIRM COSTS
UNIVERSITY OF TORONTO ECO100: INTRODUCTORY ECONOMICS
DEPARTMENT OF ECONOMICS ROBERT GAZZALE, PHD

43. Buford Bus Manufacturing installs a new assembly line. As a result, the output produced per worker
increases. The marginal cost of output at Buford:
A) will increase (the MC curve will shift up).
B) will decrease (the MC curve will shift down).
C) will be unchanged.
D) is at its maximum.

44. If average total cost is declining, marginal cost cannot be increasing.

A) True
B) False

45. (Table: Cost Data) Look at the table Cost Data. When the purse factory produces five units of output
(purses), which of the following is true about the firm's cost curves?
A) Marginal cost is greater than average total cost, and average total cost is rising.
B) Average total cost is greater than average variable cost, and average variable cost is falling.
C) Marginal cost is below average variable cost, and average variable cost is falling.
D) Marginal cost is above average variable cost and below average total cost, and average total cost is rising.

46. A fixed input is one:

A) that exists in nature and there is only so much of it.
B) that can be used for one thing only.
C) that can never produce more or less in any period.
D) whose quantity cannot be changed in the short run.

201211 9 PRACTICE PROBLEMS: FIRM COSTS

UNIVERSITY OF TORONTO ECO100: INTRODUCTORY ECONOMICS
DEPARTMENT OF ECONOMICS ROBERT GAZZALE, PHD

Answers

1. C
2. B
3. a) When four workers are employed, Marie has VC = 4 ∞ $2,000 = $8,000, plus FC = $500, for a total of
$8,500.
b) Average total cost is equal to $50 at output levels of 130 and 170 textbooks. Somewhere between
130 and 170, the ATC would have reached a minimum value before beginning to rise.
c) At 130 textbooks, total cost amounts to $6,500. To break even, 130P must equal $6,500, so Marie
must charge $50 per textbook.
4. D
5. B
6. The idea is that for a while you can add more cooks (a variable input) to a kitchen (a fixed input) and
create more and more food. The total product in this case is rising. However, at some point one more
cook added to the same kitchen is associated with less production because each cook has a very limited
amount of capital equipment with which to work and they get in each other's way. In other words, the
total product has fallen, or the marginal product has become negative.
7. B
8. A
9. A
10. B
11. B
12. B
13. D
14. B
15. B
16. D
17. C
18. B
19. D
20. A
21. A
22. B
23. B
24. D
25. This statement is sometimes true and sometimes untrue. When marginal cost is rising and above average
total cost, average total cost is definitely rising. But when marginal cost is rising and still below average
total cost, average total cost is falling.
26. A
27. D
28. C
29. C
30. C
31. C
32. B
33. D
34. B
35. B

201211 10 PRACTICE PROBLEMS: FIRM COSTS

UNIVERSITY OF TORONTO ECO100: INTRODUCTORY ECONOMICS
DEPARTMENT OF ECONOMICS ROBERT GAZZALE, PHD

36. A
37. D
38. D
39. C
40. B
41. B
42. A
43. B
44. False
45. A
46. D

201211 11 PRACTICE PROBLEMS: FIRM COSTS