Costs of Production and Returns to Scale

Suppose a firm begins to hire workers for a newly completed plant with a fixed amount of machinery. As the firm hires additional workers, one would expect the marginal product to

• Fall initially, but eventually rise
• Rise initially, but eventually fall
• Rise consistently due to diminishing return
• Rise consistently due to the advantages of specialization
• Rise consistently due to economies of scale

In the short run, which of the following costs must continuously decrease as output produced increases?

• Total variable cost
• Total fixed cost
• Average variable cost
• Average fixed cost
• Average total cost

If the average variable cost of producing 5 units of a good is $100 and the average variable cost of producing 6 units is $150, then the marginal cost of increasing output from 5 to 6 units is

• 50
• 250
• 300
• 400
• 500

If labor is the only variable input in the production process, the short run marginal cost curve is upward sloping because which of the following occurs as more and more labor is added?

• Output decreases, and thus marginal cost increases
• Output increases, and thus marginal cost increases
• Output increases at an increasing rate, and thus the cost of producing each additional unit of output increases
• Output increases at an decreasing rate, and thus the cost of producing each additional unit of output increases
• Output increases at an decreasing rate, and thus the cost of producing each additional unit of output decreases

In the short run, which of the following is true of a firm’s average total cost of production?

• It is equal to marginal cost plus average variable cost
• It is equal to marginal cost plus average fixed cost
• It is equal to average variable cost plus average fixed cost
• It always increases when a firm increases production
• It is zero if the firm shuts down

If a firm’s average total cost decreases as the firm increases its output, the firm’s marginal cost must be

• Greater than the average variable cost
• Less than the average fixed cost
• Less than the average total cost
• Decreasing
• Negative

Which of the following is true of the marginal cost curve?

• It intersects the average variable cost curve and the average total cost curve at each curve’s minimum point
• It intersects the average variable cost curve and the average fixed cost curve at each curve’s minimum point
• It lies between the total cost curve and the total variable cost curve
• It increases initially, for a time, but begins to decline when the point of diminishing returns is reached
• It decreases, because average variable cost is less than marginal cost

If the marginal cost of producing the first unit of some good is $20 and the marginal cost of producing the second unit is $30, the average variable cost of producing 2 units is

• 5
• 10
• 20
• 25
• 50

Short-run marginal costs eventually increase because of the effects of

• increasing marginal product
• diminishing marginal product
• diseconomies of scale
• economies of scale
• increasing fixed costs

If a new tax on capital increases a firm’s fixed cost of production, which of the following will occur in the short run?

• Marginal cost will increase.
• Average variable cost will increase.
• Average total cost will increase.
• The profit-maximizing level of output will increase.
• The profit-maximizing level of output will decrease.