4ECON005C Exploring Economics - Microeconomics
Tutorial week 6. The Producer Theory: Production Cost
MULTIPLE CHOICE QUESTIONS
Question 1. Which of the following statements is true regarding the differences between
economic and accounting costs?
A) Accounting costs include all implicit and explicit costs.
B) Economic costs include implied costs only.
C) Accountants consider only implicit costs when calculating costs.
D) Accounting costs include only explicit costs.
Question 2. Which of the following costs always declines as output increases?
A) Average cost
B) Marginal cost
C) Fixed cost
D) Average fixed cost
E) Average variable cost
Question 3. An isocost line reveals the
A) costs of inputs needed to produce along an isoquant.
B) costs of inputs needed to produce along an expansion path.
C) input combinations that can be purchased for a given total cost.
D) output combinations that can be produced with a given outlay of funds.
Question 4. When an isocost line is just tangent to an isoquant, we know that:
A) output is being produced at minimum cost.
B) output is not being produced at minimum cost.
C) the two products are being produced at the least input cost to the firm.
D) the two products are being produced at the highest input cost to the firm.
Question 5. At the optimum combination of two inputs,
A) the slopes of the isoquant and isocost curves are equal.
B) costs are minimized for the production of a given output.
C) the marginal rate of technical substitution equals the ratio of input prices.
D) all of the above
E) A and C only
4ECON005C Exploring Economics - Microeconomics
Question 6. The total cost (TC) of producing computer software diskettes (Q) is given
as: TC = 200 + 5Q. What is the variable cost?
A) 200
B) 5Q
C) 5
D) 5 + (200/Q)
E) none of the above
Question 7. The total cost (TC) of producing computer software diskettes (Q) is given
as: TC = 200 + 5Q. What is the fixed cost?
A) 200
B) 5Q
C) 5
D) 5 + (200/Q)
E) none of the above
Question 8. The total cost (TC) of producing computer software diskettes (Q) is given
as: TC = 200 + 5Q. What is the marginal cost?
A) 200
B) 5Q
C) 5
D) 5 + (200/Q)
E) none of the above
Question 9. The total cost (TC) of producing computer software diskettes (Q) is given
as: TC = 200 + 5Q. What is the average total cost?
A) 500
B) 5Q
C) 5
D) 5 + (200/Q)
E) none of the above
Question 10. We typically think of labor as a variable cost, even in the very short run.
However, some labor costs may be fixed. Which of the following items represents an
example of a fixed labor cost?
A) An hourly employee
B) A temporary worker who is paid by the hour
C) A salaried manager who has a three-year employment contract
D) none of the above
4ECON005C Exploring Economics - Microeconomics
QUESTIONS FOR DISCUSSION
Question 11. A firm pays its accountant an annual retainer of $10,000. Is this an economic
cost?
Question 12. Suppose that labor is the only variable input to the production process. If the
marginal cost of production is diminishing as more units of output are produced, what
can you say about the marginal product of labor?
Question 13. Assume that the marginal cost of production is greater than the average variable
cost. Can you determine whether the average variable cost is increasing or decreasing?
Explain.
EXERCISES
Question 14. Complete the following table:
Total Variable Fixed Marginal
Output Cost Cost Cost Cost
0 60
1 10
2 90
3 20
4 80
5 180
6 50
Question 15. Joe quits his computer programming job, where he was earning a salary of
$50,000 per year, to start his own computer software business in a building that he owns
and was previously renting out for $24,000 per year. In his first year of business he has
the following expenses: salary paid to himself, $40,000; rent, $0; other expenses,
$25,000. Find the accounting cost and the economic cost associated with Joe’s computer
software business.
4ECON005C Exploring Economics - Microeconomics
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Question 16. Suppose that a firm’s production function is q = 10L2 K 2 . The cost of a
unit of labor is $20 and the cost of a unit of capital is $80. The firm’s total cost
is $800.
a. Write cost equation for the firm. What optimal combination of capital and labor
should the firm use if it wants to minimize the total cost of production?
b. The firm is currently producing 100 units of output and has determined that the cost-
minimizing quantities of labor and capital are __ and __, respectively (see ‘a’
section). Graphically illustrate this using isoquants and isocost lines.
c. The firm now wants to increase output to 140 units. If capital is fixed in the short
run, how much labor will the firm require?
K
d. If the marginal rate of technical substitution (MRTS) is , find the optimal level of
L
capital and labor required to produce the 140 units of output.
HOMEWORK:
Question 17. The short-run cost function of a company is given by the equation TC = 200 +
55q, where TC is the total cost and q is the total quantity of output, both measured in
thousands.
a. What is the company’s fixed cost?
b. If the company produced 100,000 units of goods, what would be its average variable
cost?
c. What would be its marginal cost of production?
d. What would be its average fixed cost?