spartan1

Which of the following most accurately describes the shapes of the average variable cost (AVC) and average total cost (ATC) curves?

A) The AVC curve is U-shaped whereas the ATC curve declines initially then flattens.

B) The AVC and ATC curves are both U-shaped.

C) The AVC and ATC curves both decrease initially, and then flatten.

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The AVC curve is U-shaped, declining at first due to efficiency, but eventually increasing due to diminishing returns. The AFC curve decreases as output increases, and eventually flattens out. The ATC is U-shape because it is the sum of the decreasing-to-flat AFC curve plus the U-shaped AVC curve. ATC = AFC + AVC.

spartan1

Which of the following most accurately describes the shape of the average fixed cost (AFC) curve? The AFC curve:

A) becomes flatter as output increases.

B) is always below the average variable cost curve.

C) intersects the marginal cost curve at the marginal cost curve’s minimum.

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The AFC curve declines initially, but as output increases it flattens because a fixed cost is being averaged over more and more units of output.

spartan1

If marginal cost is above the average cost, when you produce your next unit:

A) average cost will decline.

B) average cost will increase.

C) average cost will be flat.

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If marginal cost is above the average cost, when you produce your next unit, average cost will increase. Because marginal cost is the cost of producing the next unit, and because this cost is above the firm's average cost per unit, the average cost per unit must increase, if only slightly. Based on the information provided in the question, there is no way to know what will happen to the marginal cost of future units produced.

spartan1

Which of the following most accurately describes the relationship between the average total cost (ATC) curve and the average variable cost (AVC) curve? The vertical distance between the ATC and AVC curves:

A) increases as output increases.

B) increases and then decreases as output increases.

C) decreases as output increases.

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The vertical distance between the ATC curve and AVC cost curve is average fixed cost, which decreases as output increases because more output is averaged over the same cost.

spartan1

Marginal cost is most accurately defined as the:

A) cost that a consumer must incur to consume an additional unit of a good or service.

B) value of the good or service that a consumer must forego in order to consume an additional unit of a good or service.

C) cost of producing one more unit of a good or service.

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Marginal cost is the cost of producing one more unit of output.

spartan1

Suppose a price-taker firm produces baseball bats that sell at a price of $100 each. This firm’s average total cost at the current level of production is $150 per bat, and the average fixed cost is $40 per bat. Which of the following statements is most accurate regarding this firm? They should:

A) continue producing baseball bats because they are covering their fixed costs.

B) shut down in the short run because their average total cost is greater than their price.

C) shut down in the short run because their average variable cost is greater than their price.

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Variable costs = $150 (ATC) − $40 (AFC) = $110 (AVC). At a selling price of $100 the firm is not covering its variable costs and will have losses greater than its fixed costs if it stays in business.

spartan1

In the short run, if price is below average total cost (ATC) the firm will:

A) raise prices.

B) keep running as long as it is covering its variable costs.

C) produce more.

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In the short run, if the firm is covering its average variable costs and some of its fixed costs it will continue to operate as long as the situation is temporary.

spartan1

In the long run, if price is below average total cost (ATC) the firm will:

A) keep running.

B) cover its variable costs.

C) shut down.

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If the price is below ATC then the firm is losing money. If the firm believes the price will never exceed ATC the only way to eliminate fixed costs is to go out of business.

spartan1

A firm in a perfectly competitive industry that seeks to maximize profit is most likely to continue production in the short run as long which of the following conditions exists? Price is equal to or greater than:

A) average variable costs.

B) average fixed cost.

C) marginal cost.

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If a firm is covering its average variable costs, it will continue to operate in the short run since it is covering some portion of its fixed costs.

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.

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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.