Question

Fixed costs include:

Select one:

a. variable labor expenses.

b. output-related energy costs.

c. output-related raw material costs.

d. variable interest costs for borrowed capital.

If a total product curve exhibits increasing returns to a variable input, the cost elasticity is:

Select one:

a. equal to one.

b. greater than one.

c. unknown, without further information.

d. less than one.

f the productivity of variable factors is decreasing in the short-run:

Select one:

a. marginal cost must increase as output increases.

b. average cost must decrease as output increases.

c. average cost must increase as output increases.

d. marginal cost must decrease as output increases

If the slope of a long-run total cost function decreases as output increases, the firm's underlying production function exhibits:

Select one:

a. constant returns to scale.

b. decreasing returns to scale.

c. decreasing returns to a factor input.

d. increasing returns to scale.

In the decision process, management should always consider:

Select one:

a. relevant costs.

b. sunk costs.

c. implicit costs only.

d. historical costs.

Answer 1

(1) (d)

Interest costs are treated as fixed costs.

(2) (d)

Cost elasticity = Change in costs / Change in output

With increasing returns to scale, output increases more than proportionately with an increase in all inputs, so average cost falls and cost elasticity is less than 1.

(3) (a)

With diminishing returns to variable factors, marginal cost increases with increase in output.

(4) (d)

With increasing returns to scale, output increases more than proportionately with an increase in all inputs, so marginal cost (= slope of total cost curve) falls with increase in output.

(5) (a)

Only relevant (incremental) costs should be considered.