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Exam 7: The Cost of Production

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Question 71

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A learning curve may be expressed as a relationship between the labor per unit (L) and the cumulative number of units produced (N) . Which of the following learning curves exhibits a faster reduction in cost of production due to learning, (1) L = 10 + N^-1 or (2) L = 10 + N^-0.5?

A) Learning curve (1)
B) Learning curve (2)
C) Curves (1) and (2) exhibit the same rate.
D) We cannot determine the rate of cost reduction without knowing the value of N.

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Question 72

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Michael's dairy farm's cost function is C(q) = , where q is the amount of output and A is the average age of Michael's employees. Currently, the average age of Michael's employees is 32. Next year, Michael expects the average age of his employees to decrease by 3 years due to job turnover. What happens to Michael's cost of production if he is correct?

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Presently, Michael's costs are...

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Question 73

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The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the variable cost?

Constantine purchased 100 shares of IBM stock several years ago for $150 per share. The price of these shares has fallen to $55 per share. Constantine's investment strategy is "buy low, sell high." Therefore, he will not sell his IBM stock until the price rises above $150 per share. If he sells at a price lower than $150 per share he will have "bought high and sold low." Constantine's decision:

Your firm owns an old truck that is used to make local deliveries. The truck is fully depreciated and only costs $1.20 per hour to operate, but you could rent it to another firm for $15.00 per hour. What is the opportunity cost of operating this truck in your business?

Two small airlines provide shuttle service between Las Vegas and Reno. The services are alike in every respect except that Fly Right bought its airplane for $500,000, while Fly by Night rents its plane for $30,000 a year. If Fly Right were to go out of business, it would be able to rent its plane to another airline for $30,000. Which airline has the lower costs?

For any given level of output:

Fixed costs are fixed with respect to changes in

Cogswell Cogs short-run cost function is: C(q, K) = + 15K, where q is the number of cogs produced and K is the amount of robot hours used. Currently, Cogs uses 16 robot hours to produce 300 cogs. What happens to the average total cost of producing 300 cogs if Cogswell increases robot hours to 25?

Figure 7.1 -Refer to Figure 7.1. At output level Q₁

Consider the following statements when answering this question I. The marginal cost curve intersects the average total cost and average variable cost curves at their minimum values. II. When a firm has positive fixed costs, the output level associated with minimum average variable costs is less than the output associated with minimum average total costs.

Complete the following table (round each answer to the nearest whole number): Total Variable Fixed Marginal Average Avg. Var. Avg. Fixed Output Cost Cost Cost Cost Cost Cost Cost 0 1 5 2 30 3 13 4 105 10 5 110 6 50

Which of the following is true regarding the relationship between returns to scale and economies of scope?

Consider the following statements when answering this question. I. Investment in new technology generates learning by doing. II. Economies of scale cannot shift the long-run average cost curve down, whereas learning by doing can.

One Guy's short-run cost function is: C(q, K) = + 0.25K, where q is the number of pizzas produced and K is the number of ovens. Currently, One Guy's is leasing 4 ovens in the short run. Calculate the average cost of producing 10 pizzas. The manager of One Guy's is considering leasing 5 additional ovens. If One Guy's adds 5 more ovens, what is the average total cost of producing 10 pizzas?

From Example 7.2, most pizza restaurants have large fixed costs and relatively low variable costs. What does this tell us about the average variable cost (AVC) of producing pizza?

Consider the following statements when answering this question. I. A technology with increasing returns to scale will generate a long-run average cost curve that has economies of scale. II. Diminishing returns determines the slope of the short-run marginal cost curve, whereas returns to scale determine the slope of the long-run marginal cost curve.

Scenario 7.2: The production function for earthquake detectors (Q) is given as follows: Q = 4K^1/2L^1/2 where K is the amount of capital employed and L is the amount of labor employed. The price of capital, P_K, is $18 and the price of labor, P_L, is $2. -Refer to Scenario 7.2. This production function is an example of which of the following types of production functions?

Scenario 7.2: The production function for earthquake detectors (Q) is given as follows: Q = 4K^1/2L^1/2 where K is the amount of capital employed and L is the amount of labor employed. The price of capital, P_K, is $18 and the price of labor, P_L, is $2. -Refer to Scenario 7.2. What is the marginal cost of the 60th earthquake detector?

The difference between the economic and accounting costs of a firm are