3.3.2 short quiz

What is the formula to calculate total cost?

• Total cost = Average cost x Quantity

• Total cost = Total fixed cost - Total variable cost

• Total cost = Marginal cost x Quantity

• Total cost = Total fixed cost + Total variable cost

Answer explanation

The correct formula for total cost is Total fixed cost + Total variable cost. This accounts for all costs incurred in production, making it essential for understanding overall expenses.

Which of the following is true about average fixed cost (AFC)?

• AFC decreases as output increases

• AFC is equal to average variable cost

• AFC increases as output increases

• AFC remains constant as output increases

Answer explanation

Average fixed cost (AFC) decreases as output increases because fixed costs are spread over more units of output, leading to a lower cost per unit. Thus, the correct statement is that AFC decreases as output increases.

What is the relationship between marginal cost (MC) and average cost (AC) when MC is less than AC?

• AC remains constant

• AC is decreasing

• AC is increasing

• AC equals MC

Answer explanation

When marginal cost (MC) is less than average cost (AC), it pulls the average down, indicating that AC is decreasing. This occurs because producing additional units at a lower cost reduces the overall average.

What does the assumption of diminishing marginal productivity imply for short-run cost curves?

• Marginal cost equals average cost at all levels of output

• Marginal cost decreases as output increases

• Marginal cost remains constant as output increases

• Marginal cost increases as output increases

Answer explanation

The assumption of diminishing marginal productivity means that as more units of a variable input are added, the additional output produced from each unit decreases. This leads to increasing marginal costs as output increases.

How is average variable cost (AVC) calculated?

• AVC = Total fixed cost / Quantity

• AVC = Total cost / Quantity

• AVC = Marginal cost / Quantity

• AVC = Total variable cost / Quantity

Answer explanation

Average variable cost (AVC) is calculated by dividing total variable cost by the quantity of output produced. This reflects the variable costs associated with each unit of production, making the correct formula: AVC = Total variable cost / Quantity.

What happens to the long-run average cost curve when economies of scale are achieved?

• It becomes vertical

• It remains flat

• It slopes downward

• It slopes upward

Answer explanation

When economies of scale are achieved, production becomes more efficient, leading to a decrease in the long-run average cost. This results in the long-run average cost curve sloping downward.

Which of the following is true about the relationship between short-run and long-run average cost curves?

• The long-run average cost curve is unrelated to short-run average cost curves

• The long-run average cost curve is the envelope of all short-run average cost curves

• The long-run average cost curve is always below the short-run average cost curve

• The long-run average cost curve is always above the short-run average cost curve

Answer explanation

The long-run average cost curve represents the lowest possible cost of production at each output level, encompassing all short-run average cost curves. Thus, it is the envelope of these curves, reflecting optimal production efficiency.

What is the formula to calculate marginal cost (MC)?

• MC = Total cost / Quantity

• MC = Change in total cost / Change in quantity

• MC = Total variable cost / Quantity

• MC = Total fixed cost / Quantity

Answer explanation

The correct formula for marginal cost (MC) is MC = Change in total cost / Change in quantity. This measures the additional cost incurred for producing one more unit, reflecting the incremental cost of production.

Which of the following best describes total fixed cost (TFC)?

• TFC is equal to total cost

• TFC changes with the level of output

• TFC remains constant regardless of output

• TFC is equal to total variable cost

Answer explanation

Total Fixed Cost (TFC) remains constant regardless of the level of output produced. It does not change with production levels, unlike variable costs, which fluctuate with output.

What happens to average total cost (ATC) when marginal cost (MC) is greater than ATC?

• ATC decreases

• ATC increases

• ATC remains constant

• ATC equals MC

Answer explanation

When marginal cost (MC) is greater than average total cost (ATC), it pulls the ATC upward. This is because producing additional units at a higher cost increases the overall average, leading to an increase in ATC.