Short-Run Production Costs
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AP Microeconomics › Short-Run Production Costs
Which of the following is most likely to be a variable cost for a manufacturing firm in the short run?
The salary of its chief executive officer.
The cost of electricity to operate its machinery.
The monthly lease payment for its factory space.
The annual premium on its business liability insurance.
Explanation
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.
If the government imposes a new $$5$$ per-unit tax on the output of a firm, how will this tax affect the firm's short-run cost curves?
The marginal cost curve will be unaffected, but the average total cost and average fixed cost curves will shift upward.
The marginal cost and average total cost curves will shift upward, but the average fixed cost curve will be unchanged.
Only the average fixed cost curve and the average total cost curve will shift upward.
Only the marginal cost curve will shift upward, while the average cost curves will remain unchanged.
Explanation
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.
In the short run, as a firm increases its output from a very low level, its average fixed cost will
always decrease but will never become zero.
increase at a decreasing rate across all output levels.
initially decrease and then increase as output grows.
remain constant because fixed costs do not change with output.
Explanation
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.
The marginal cost curve slopes upward in the short run primarily as a result of
the existence of significant economies of scale.
the law of diminishing marginal utility for consumers.
the law of diminishing marginal returns to a variable input.
the effect of increasing marginal returns to a variable input.
Explanation
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.
At low levels of output, a firm's short-run marginal cost curve is typically downward sloping. This phenomenon is best explained by
the law of diminishing marginal utility affecting input prices.
the presence of significant diseconomies of scale in production.
the rapid decline in average fixed costs as production begins.
increasing marginal returns due to specialization and division of labor.
Explanation
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.
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?
Average variable cost must be increasing.
Average variable cost must be decreasing.
Average total cost must be increasing.
Marginal cost must be increasing.
Explanation
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.
Marginal cost is correctly defined as the
total variable cost divided by the total quantity of output produced by the firm.
change in total cost resulting from producing one additional unit of output.
change in total cost resulting from a one-unit change in a fixed input like capital.
total cost divided by the total quantity of output produced by the firm.
Explanation
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.
A firm's total cost is $$1,000$$ at an output of 100 units. If its total fixed cost is $$400$$, what is its total variable cost?
$$10$$
$$6$$
$$1,400$$
$$600$$
Explanation
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 = $$\1,000$$ - $$400$$ = $$\600$$.
A firm is producing at an output level where its marginal cost is $$25$$ and its average total cost is $$22$$. At this output level, it must be true that
average total cost is increasing.
average total cost is at its minimum value.
average total cost is decreasing.
average variable cost must be decreasing.
Explanation
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.
A bakery's total cost to produce 40 loaves of bread is $$200$$. Its total cost to produce 41 loaves is $$208$$. What is the marginal cost of the 41st loaf?
$$8$$
$$5.07$$
$$5$$
$$208$$
Explanation
Marginal cost (MC) is the change in total cost (ΔTC) divided by the change in quantity (ΔQ). Here, ΔTC = $$\208$$ - $$200$$ = $$8$$, and ΔQ = 41 - 40 = 1. Therefore, the marginal cost of the 41st loaf is $$8$$ / 1 = $$8$$.