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Short-Run Production Costs - AP Microeconomics

  1. A firm's total cost of producing 20 units is 500500, and its average fixed cost is 1010. What is the firm's total variable cost?
    Answer: 300300 First, find Total Fixed Cost (TFC) using the formula TFC = AFC × Q. TFC = $10 × 20 = $200. Next, use the total cost formula TC = TFC + TVC. To find Total Variable Cost (TVC), rearrange the formula: TVC = TC - TFC. TVC = $500 - $200200$ = $300.
  2. Marginal cost is correctly defined as the
    Answer: change in total cost resulting from producing one additional unit of output. Marginal cost (MC) specifically measures the addition to total cost that arises from producing one more unit of a good or service. It is calculated as the change in total cost divided by the change in quantity (ΔTC/ΔQ). The other options define different cost concepts.
  3. If a firm decides to shut down and produce zero units of output in the short run, which of the following must be true?
    Answer: Total cost is equal to total fixed cost, which is greater than zero. In the short run, a firm has both fixed and variable costs. If it produces zero output, its variable costs will be zero, but it must still pay its fixed costs. Therefore, its total cost (TC = TFC + TVC) will be equal to its total fixed cost (TFC), which is a positive value.
  4. The marginal cost curve slopes upward in the short run primarily as a result of
    Answer: the law of diminishing marginal returns to a variable input. The law of diminishing marginal returns states that as more units of a variable input (like labor) are added to fixed inputs (like capital), the marginal product of the variable input will eventually decrease. This means more of the variable input is needed for each additional unit of output, which causes the marginal cost of production to increase, leading to an upward-sloping MC curve.
  5. If a firm's landlord increases the monthly rent for its factory, which of the firm's short-run cost curves will shift upward?
    Answer: The average fixed cost curve and the average total cost curve only. Rent is a fixed cost because it does not vary with the level of output. An increase in a fixed cost raises the total fixed cost (TFC) and thus the average fixed cost (AFC). Since average total cost (ATC) is the sum of AFC and average variable cost (AVC), the ATC curve also shifts upward. Marginal cost (MC) and AVC are unaffected because they are derived from variable costs.
  6. At low levels of output, a firm's short-run marginal cost curve is typically downward sloping. This phenomenon is best explained by
    Answer: increasing marginal returns due to specialization and division of labor. Initially, as a firm adds variable inputs like labor to its fixed capital, workers can specialize in tasks. This specialization and division of labor lead to increasing marginal product (each worker adds more to output than the previous one), which in turn causes the marginal cost of production to fall.
  7. If the government imposes a new 55 per-unit tax on the output of a firm, how will this tax affect the firm's short-run cost curves?
    Answer: The marginal cost and average total cost curves will shift upward, but the average fixed cost curve will be unchanged. A per-unit tax acts as a variable cost because the total tax paid depends directly on the number of units produced. This increase in variable cost will shift the marginal cost (MC), average variable cost (AVC), and average total cost (ATC) curves upward. Since it is not a fixed cost, the average fixed cost (AFC) curve will not be affected.
  8. If a firm's marginal cost of production is currently less than its average variable cost, then as output increases, which of the following must be true?
    Answer: Average variable cost must be decreasing. The relationship between a marginal and an average value is such that if the marginal value is below the average, it pulls the average down. Therefore, if marginal cost (MC) is less than average variable cost (AVC), the cost of producing the next unit is lower than the current average, causing the AVC to decrease.
  9. A firm is producing at an output level where its marginal cost is 2525 and its average total cost is 2222. At this output level, it must be true that
    Answer: average total cost is increasing. When marginal cost (MC) is greater than average total cost (ATC), the cost of producing the next unit is higher than the current average cost. This pulls the average cost up. Therefore, at this level of output, the firm's average total cost must be increasing.
  10. A firm produces 150 units of a good. Its total fixed cost is 600600 and its total variable cost is 900900. The firm's average total cost is
    Answer: 10.0010.00 First, calculate total cost (TC) by adding total fixed cost (TFC) and total variable cost (TVC): TC = $600 + 900900 = $1,500. Then, calculate average total cost (ATC) by dividing total cost by the quantity of output (Q): ATC = TC / Q = $1,500 / 150 = $10.00.
  11. A firm's average variable cost curve reaches its minimum value at the quantity of output where
    Answer: the marginal cost curve intersects the average variable cost curve. A standard geometric property of cost curves is that the marginal cost (MC) curve intersects the average variable cost (AVC) curve at the AVC curve's minimum point. When MC is below AVC, AVC is falling; when MC is above AVC, AVC is rising.
  12. If a firm hires its only variable input, labor, in a competitive market, and the marginal product of labor is decreasing, the firm's short-run marginal cost of output must be
    Answer: increasing because each additional unit costs more to produce. There is an inverse relationship between marginal product (MP) and marginal cost (MC), given by the formula MC = Wage / MP of labor. If the marginal product of labor is decreasing (due to diminishing marginal returns), then the denominator in the formula is getting smaller, which means the value of MC must be increasing.
  13. A firm's total cost is 1,0001,000 at an output of 100 units. If its total fixed cost is 400400, what is its total variable cost?
    Answer: 600600 Total cost (TC) is the sum of total fixed cost (TFC) and total variable cost (TVC). The formula is TC = TFC + TVC. Rearranging for total variable cost gives TVC = TC - TFC. In this case, TVC = $1,000 - $400400$ = $600.
  14. A small business has total fixed costs of 500500 per month. In a particular month, it produces 20 units of output with a total variable cost of 400400. What is the average total cost of production for that month?
    Answer: 4545 First, calculate the Total Cost (TC) by summing Total Fixed Cost (TFC) and Total Variable Cost (TVC). TC = $500 + 400400 = $900. Then, calculate the Average Total Cost (ATC) by dividing the Total Cost by the quantity of output (Q). ATC = TC / Q = $900 / 20 = $45.
  15. In the short run, as a firm increases its output from a very low level, its average fixed cost will
    Answer: always decrease but will never become zero. Average fixed cost (AFC) is calculated as total fixed cost (TFC) divided by the quantity of output (Q). Since TFC is a constant value in the short run, as Q increases, the value of AFC = TFC/Q must continuously decrease. This effect is often called 'spreading the overhead'. AFC will approach zero as output becomes very large but will never actually be zero.
  16. Which of the following is most likely to be a variable cost for a manufacturing firm in the short run?
    Answer: The cost of electricity to operate its machinery. Variable costs are costs that change with the level of production. The amount of electricity needed to run machinery will increase as the firm produces more goods, making it a variable cost. Lease payments, CEO salaries, and insurance premiums are typically fixed costs in the short run as they do not vary with output.
  17. A firm is required to pay a new, one-time lump-sum tax of 20,00020,000 to the government. In the short run, this tax will
    Answer: increase the firm's average total cost but will not affect its marginal cost. A lump-sum tax is a fixed cost because its amount does not change with the level of output. An increase in fixed costs raises the total fixed cost (TFC) and average fixed cost (AFC), which in turn raises the average total cost (ATC). However, since marginal cost (MC) is the change in cost from producing one more unit, and this tax does not change with output, MC is unaffected.
  18. A bakery's total cost to produce 40 loaves of bread is 200200. Its total cost to produce 41 loaves is 208208. What is the marginal cost of the 41st loaf?
    Answer: 88 Marginal cost (MC) is the change in total cost (ΔTC) divided by the change in quantity (ΔQ). Here, ΔTC = $208 - $200200$ = 88, and ΔQ = 41 - 40 = 1. Therefore, the marginal cost of the 41st loaf is 88 / 1 = 88.
  19. Assume a firm that manufactures furniture experiences a significant increase in the price of wood. In the short run, which of the following will occur?
    Answer: The average total cost and marginal cost curves will shift upward. Wood is a raw material, which is a variable input. An increase in the price of a variable input raises the firm's total variable cost (TVC) and its marginal cost (MC) for every unit of output. Consequently, the MC, average variable cost (AVC), and average total cost (ATC) curves will all shift upward. The average fixed cost (AFC) curve is unaffected.
  20. The U-shape of the short-run average variable cost curve can be explained by
    Answer: the effect of initial increasing marginal returns, followed by eventual diminishing marginal returns. The average variable cost (AVC) curve is U-shaped due to the behavior of marginal returns. Initially, increasing marginal returns cause marginal cost (MC) to fall, which pulls AVC down. Eventually, diminishing marginal returns set in, causing MC to rise above AVC, which pulls AVC up.

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