spartan1

John Klement is a soybean farmer who harvests 125,000 bushels of soybeans annually. Klement’s fixed costs are $200,000 and his variable costs are $5 per bushel. Soybeans are currently priced at $5.35 per bushel. Based on his estimates, Klement sees soybean prices being relatively stable for the next two years, then increasing to $7.00 per bushel due to increased demand from Japan. What action should Klement take? Klement should:

A) continue operating his business as usual.

B) cut his production by 50% for the next two years and then resume full production.

C) shut down for two years and then restart his business.

---

Since Klement is selling soybeans, a common commodity, he is a price taker and therefore can not adjust the price. He should continue operating his business as normal as he is currently covering variable costs and part of fixed costs. In two years from now, he will be able to cover both fixed and variable costs and be able to make a substantial profit.

spartan1

The upward sloping segment of a long-run average total cost curve represents the existence of:

A) economies of scale.

B) efficiencies of scale.

C) diseconomies of scale.

---

Diseconomies of scale occur along the upward sloping segment of the long-run average total cost curve where costs rise as output increases. The flat portion at the bottom of the long-run average total costs curve represents constant returns to scale.

spartan1

Which of the following most accurately describes economies of scale? Economies of scale:

A) increase at a decreasing rate.

B) occur when long-run unit costs fall as output increases.

C) are dependent on short-run average costs.

---

Economies of scale occur when the percentage increase in output is greater than the percentage increase in the cost of all inputs. Economies of scale occur over the range where the long-run average cost curve slopes downward.

spartan1

A firm can determine its profit-maximizing quantity of output by producing up to the quantity at which:

A) total revenue equals total cost.

B) marginal revenue equals marginal cost.

C) average revenue equals average total cost.

---

At the profit-maximizing quantity of output, marginal revenue equals marginal cost. The quantity for which total revenue equals total cost, or average revenue equals average total cost, is the firm’s breakeven point.

spartan1

Which of the following statements about the short-run and long-run decision time frames is most accurate?

A) In the long run, quantities of some resources are fixed.

B) In the short run, technology of production is variable.

C) In the long run, a firm can adjust its input quantities, production methods, and plant size.

---

In the short run, quantities of some resources, including technology of production, are fixed. Typically, economists treat labor and raw materials as variable, holding plant size, the amount of capital equipment, and technology constant. In the long run, all factors of production are assumed to be variable.

spartan1

Which of the following two factors are most likely to be considered variable during the short run?

A) Labor and raw materials.

B) Labor and technology.

C) Raw materials and technology.

---

Of the sets of factors listed, the two that are typically considered variable in the short run are labor and raw materials.

spartan1

The short run is best defined as:

A) the period for which the quantities of some resource inputs are fixed.

B) the period for which the quantities of all factors of production are fixed.

C) the time frame within which working capital decisions cannot be altered.

---

The short run is typically defined as the period for which the quantities of some, but not all, resources are fixed. Working capital is the difference between a firm’s current assets and current liabilities and consists of items (such as cash) that the firm can adjust in the short run.

spartan1

Which of the following factors of production is least likely to be fixed in the short run?

A) Technology.

B) Plant size.

C) Labor.

---

Labor is typically assumed to be variable in the short run.

spartan1

Which of the following is least accurate with regard to the long-run and the short-run?

A) Long-run cost curves pertain to plants of different sizes.

B) In the long-run, all costs are variable.

C) In the short run, only plant size is fixed.

---

In the short-run, labor is major variable cost. Plant size, in addition to technology and equipment, are fixed.

spartan1

Which of the following is least likely a characteristic of the long-run industry supply curve?

A) The long-run supply curve is flatter than the short-run supply curve.

B) In the long run, there will be a greater change of quantity supplied for a given price change, than in the short run.

C) The long-run supply curve is less elastic than the short run supply curve.

---

The long-run supply curve is more elastic and flatter than the short-run supply curve. In the long-run, firms have greater flexibility to alter production scale and methods. Both remaining items in this question are true for the long-run supply curve.