Topic 5: The Costs of Production

Question 1

Allocative efficiency is most accurately defined as:

Answer 1

where the last unit produced provides a marginal benefit to consumers, or price paid by the consumer, is equal to the marginal cost of producing that last unit

Question 2

Other things being the same, the shortage associated with a price ceiling will be greater, the:

Hint: draw the demand and supply curves described in the choices.

Answer 2

greater the elasticity of both demand and supply

Question 3

When Average Total Costs are rising:

Answer 3

Marginal Costs are greater than Average Total Costs

Question 4

Shane operates a transportation removalist business out of Newcastle, NSW. His operation has a large truck available for moving items such as furniture etc., and he hires workers from the local region. In this line of business the short-run is associated with:

Answer 4

hiring new workers

Question 5

If Average Total Costs (ATC) = $10 and Marginal Costs (MC) = $12, for a given level of output Q, then:
(Hint: if marginal cost is greater than average total costs (ATC) then ATC must be…)

Answer 5

the firm must be operating on the upward-sloping section of its ATC curve

Question 6

If a firm stops production, then its:

Answer 6

variable costs (e.g. wages and raw material inputs) drop to zero.

Question 7

Suppose Chip’s Chips produces bags of potato chips that sell for $3 a bag. If they sold 12 000 bags and incurred total costs of $30 000, what was the company’s profit?

Answer 7

$6, 000

Question 8

When a firm can achieve economies of scale by expanding, its long-run ATC curve:

Answer 8

slopes downward.

Question 9

Consumer surplus is defined as:

Answer 9

your maximum willingness to pay for something minus the price you actually paid

Question 10

The basic characteristic of the short-run is that:

Answer 10

the firm does not have sufficient time to change the size of its machines or factory