Question

1. In order for a taxi cab to be operated in New York City, it must have a medallion on its hood. Medallions are expensive, but can be resold, and are therefore an example of:

A. An opportunity cost

B. A sunk cost

C. An implicit cost

D. A fixed cost

2. The total cost (TC) od producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the average fixed cost?

A. 5Q

B. none of the above

C. 500

D. 5 + (200.Q)

3. If input prices are constant in the long run, a firm with increasing returns to scale can expect

A. total cost to double when output doubles

B. total cost to increase by more than double when output doubles

C. total cost to increase by less than double when output doubles

D. total costs to decrease when output doubles

Answer 1

1. Ans: A fixed cost

Explanation:

Expenditure on medallions is a fixed expenditure. A fixed asset can de resold. Thus, this is an example of fixed cost. Thus, option [D] is the correct answer.

2. Ans: none of the above

Explanation:

TC = 200 + 5Q

In the above TC function, TFC = 200 and TVC = 5Q

AFC = TFC / Q = 200 / Q

Thus, option [B] is the correct answer.

3. Ans: Total cost to increase by less than double when output doubles.

Explanation:

If input prices are constant and a firm exhibits increasing returns to scale, it means when the firm double the inputs, output will increase by more than double. So, total cost increases by less than double when output doubles. Thus, option [C] is the correct answer.