3.5 Cost of Production quiz

Which of the following would be an example of a fixed cost on a farm?

• mortgage on the land

• cost of seed

• fuel to operate machinery

• charge for fertilizer

To increase marginal return, a company might consider

• stopping production

• purchasing more machinery

• increasing input

• reducing input

In general, it is a bad move for a company to produce more of a good or service if, by doing so,

• marginal cost exceeds marginal revenue

• variable costs exceed fixed costs

• demand exceeds supply

• fixed costs exceed marginal revenue

In determining the optimal level of output, a firm should aim for the

• point where decreasing returns become negative returns

• output level where fixed costs exceed variable costs

• point of maximum profitability for the company

• output level where marginal returns are still increasing

In which of the following situations would a business be wise to shut its factory?

• when revenue exceeds variable costs

• when marginal costs exceed fixed costs

• when fixed costs exceed revenue

• when total costs exceed marginal costs

Describe:

What would be some examples of fixed costs and variable costs for a farm?

Answer explanation

Examples of fixed costs might include the costs of land, buildings, and equipment. Variable costs include seeds or feed, fertilizer, and energy.

Solve Problems Suppose you were advising a company that is experiencing a decline in marginal returns. What two steps might you recommend?

Answer explanation

Two possible solutions would be to reduce staff so that all staff are working at maximum efficiency, or to increase capital so that existing staff can be more productive.

Express Problems Clearly Why is it sometimes not a good idea for a company to simply produce more of a good or service?

Answer explanation

At some point, marginal cost will increase and eventually become greater than marginal revenue. This will decrease profits.

Identify Central Ideas What should be the basic goal of a firm when it sets a level of output?

Answer explanation

It should seek to make the highest possible profit.

Apply Concepts Explain the effect an increase in prices in the market would have on a factory’s level of production.

Answer explanation

Production would increase, because an increase in price would increase marginal revenues and raise the output necessary to achieve maximum profitability.