1. A cost that represents the value of resources used in production for which no actual monetary payment is made is called

a. accounting cost.
b. explicit cost.
c. fixed cost.
d. implicit cost.
e. opportunity cost.

2. The concept of economic profit, not to be confused with accounting profit, equals

a. total revenue minus explicit cost.
b. total revenue minus implicit cost.
c. total revenue minus both explicit and implicit cost.
d. total revenue minus opportunity cost.
e. either (c) or (d).

3. You are working at the best job you can get, let us assume, waiting on tables at a fancy restaurant and earning $20,000 per year, including tips. Then someone offers you $50,000 per year for writing computer software; and you go into business for yourself, renting a computer and printer, buying diskettes, paper, and more. We can conclude the following about your new business:

a. If the above-noted explicit costs equal $40,000 per year, your accounting profit (on which the IRS taxes you) comes to $10,000 per year.
b. If the above-noted explicit costs equal $40,000 per year, your economic profit (on the basis of which you decide whether to stay in business) comes to $20,000 per year.
c. If the above-noted explicit costs equal $10,000 per year, your accounting profit (on which the IRS taxes you) comes to $30,000 per year.
d. If the above-noted explicit costs equal $10,000 per year, your economic profit (on the basis of which you decide whether to stay in business) comes to $20,000 per year.
e. Both (a) and (d).

4. A firm is said to be earning normal profit whenever

a. accounting profit is zero.
b. accounting profit is positive.
c. economic profit is positive.
d. total revenue equals explicit plus implicit costs.
e. total revenue equals implicit cost.

5. Which of the following statements about costs is correct?

a. A cost that involves the making of an actual monetary payment is a sunk cost.
b. A cost that does not vary with the level of output is a fixed cost.
c. In the long run, variable costs are zero.
d. In the short run, when the quantity of some inputs cannot be changed, fixed costs are zero.
e. All of the above.

Table 20.1

Input Combination	Output (tons/year)	Total Fixed Cost (dollars/year)	Total Variable Cost (dollars/year)
A	0	1,000	0
B	500	1,000	300
C	900	1,000	600
D	1,200	1,000	900
E	1,300	1,000	1,200

6. Consider Table 20.1. It shows the physical output and two types of cost associated with several combinations of fixed and variable inputs that a firm can use. If each unit of the variable input costs $300/year, which of the following statements about input combination A is correct?

a. The average fixed cost is undefined.
b. The average variable cost is undefined.
c. The average total cost is undefined.
d. The marginal cost is undefined.
e. All of these statements are true.

7. Consider Table 20.1. It shows the physical output and two types of cost associated with several combinations of fixed and variable inputs that a firm can use. If each unit of the variable input costs $300/year, which of the following statements about input combination B is correct?

a. The average fixed cost equals $2/year.
b. The average variable cost equals $0.60/year.
c. The average total cost equals $2.60/year.
d. All of the above statements are correct.
e. None of the above statements is correct.

8. Consider Table 20.1. It shows the physical output and two types of cost associated with several combinations of fixed and variable inputs that a firm can use. If each unit of the variable input costs $300/year, which of the following statements about input combination C is correct?

a. The average fixed cost equals $1.11/ton.
b. The average variable cost equals $0.60/ton.
c. The average total cost equals $1.71/ton.
d. The marginal cost equals $0.60/ton.
e. All of these statements are true.

9. Consider Table 20.1. It shows the physical output and two types of cost associated with several combinations of fixed and variable inputs that a firm can use. If each unit of the variable input costs $300/year, which of the following statements about input combination D is correct?

a. The average fixed cost equals $0.98/ton.
b. The average variable cost equals $0.60/ton.
c. The average total cost equals $1.58/ton.
d. The marginal cost equals $0.60/ton.
e. All of these statements are true.

10. Consider Table 20.1. It shows the physical output and two types of cost associated with several combinations of fixed and variable inputs that a firm can use. If each unit of the variable input costs $300/year, which of the following statements about this table is correct?

a. The average fixed cost throughout the table is unchanging (which is why it is called fixed).
b. The average variable cost throughout this table is declining with higher output.
c. The average total cost throughout this table is declining with higher output.
d. There is clear evidence of the operation of the law of diminishing marginal returns.
e. The marginal cost throughout this table is a constant $300 per ton.

11. Consider Table 20.1. It shows the physical output and two types of cost associated with several combinations of fixed and variable inputs that a firm can use. If each unit of the variable input costs $300/year, which of the following statements about this table is correct?

a. As we move from combination B to E, the marginal physical product changes from 500 to 400 to 300 to 100 tons per year.
b. As we move from combination B to E, the marginal cost changes from $0.60 to $0.75 to $1.00 to $3.00 per year.
c. As we move from combination B to E, the average physical product changes from 500 to 450 to 400 to 325 input units per ton.
d. All of the above statements are correct.
e. None of the above statements is correct.

12. Which of the following statements about the relationship between marginal physical product and marginal cost is correct?

a. If the MPP increases with higher output, then MC increases with higher output as well.
b. If the MPP decreases with higher output, then MC decreases with higher output as well.
c. Both (a) and (b).
d. If the MPP decreases with higher output, then MC increases with higher output.
e. Whenever output increases, MPP lies above MC; whenever output decreases, MMP lies below MC.

13. According to the average-marginal rule,

a. whenever the marginal magnitude is above the average magnitude, the average magnitude rises.
b. whenever the marginal magnitude is above the average magnitude, the average magnitude falls.
c. whenever the marginal magnitude is below the average magnitude, the average magnitude rises.
d. whenever the marginal magnitude is rising, the average magnitude is also rising.
e. whenever the marginal magnitude is rising, the average magnitude is falling.

14. Consider Figure 20.1. A number of things are seriously wrong with this graph. These errors include

a. the labeling of the vertical axis.
b. the fact that the ATC curve is first falling and then rising, as output expands.
c. the fact that the AVC curve is first falling and then rising, as output expands.
d. the fact that the MC curve is never falling, as output expands.
e. all of the above and more.

15. Consider Figure 20.1. A number of things are seriously wrong with this graph. These errors include

a. the labeling of the horizontal axis.
b. the fact that the AVC curve is a logical impossibility, given the ATC curve.
c. the fact that, to the left of D, MC is below AVC, yet AVC is falling.
d. the fact that, to the left of E, MC is below ATC, yet ATC is falling.
e. all of the above and more.

16. Consider Figure 20.1. A number of things are seriously wrong with this graph. These errors include

a. the positioning of the AVC curve relative to the ATC curve.
b. the positioning of the MC curve relative to the ATC and AVC curves.
c. both (a) and (b).
d. the fact that, to the right of F, MC is above ATC, yet ATC is rising.
e. the fact that, to the right of G, MC is above AVC, yet AVC is rising.

17. Which of the following statements about costs is correct?

a. In the long run, total costs are the same as fixed costs because short-run variations have settled down.
b. A curve that shows the lowest unit cost at which a firm can produce any given level of output is called a long-run average total cost curve.
c. Given at least one fixed input, when all other inputs are increased by an identical percentage and, as a result, output increases by a greater percentage, a firm is said to enjoy economies of scale.
d. Given at least one fixed input, when all other inputs are increased by an identical percentage and, as a result, output increases by a smaller percentage, a firm is said to suffer diseconomies of scale.
e. Both (c) and (d).

18. Which of the following statements about costs is correct?

a. When all inputs are decreased simultaneously by some percentage and, as a result, output decreases by the same percentage, a firm experiences constant returns to scale and finds its unit costs to be unchanged.
b. When all inputs are increased simultaneously by some percentage and, as a result, output increases by the same percentage, a firm experiences constant returns to scale and finds its unit costs to be unchanged.
c. Both (a) and (b).
d. A firm's unit costs can never increase if it is subject to economies of scale.
e. A firm's unit costs can never decrease if it is subject to diseconomies of scale.

19. Which of the following statements about costs is correct?

a. When the law of diminishing marginal returns is applied to the long run, it turns into the law of diseconomies of scale.
b. The very existence of economies of scale contradicts the law of diminishing marginal returns.
c. When economies of scale are present, LRATC is rising with falling output.
d. When diseconomies of scale are present, LRATC is rising with falling output.
e. The minimum efficient scale of production is found at the minimum point of every SRATC curve.

20. Which of the following statements about costs is correct?

a. Economies of scale can be explained by the division of labor (specialization) and the accompanying use of machinery that is made possible as a firm grows in size.
b. Diseconomies of scale can be traced to coordination, communication, and monitoring problems that arise as a firm grows in size.
c. Both (a) and (b).
d. One can estimate the number of efficient firms that an industry can support by dividing 100 by the industry's minimum efficient scale, measured as a percentage of national consumption.
e. Any cost curve is likely to shift vertically up and left in response to technological advances.