Question

Use the table below to answer the following two questions: Units of output Total fixed cost Total variable cost

1 150 50, 2 150 96, 3 150 140, 4 150 180

1) What is the marginal cost of producing the third unit of output? a) $20 b) $44 c) $70 d) this cannot be determined from the data

2) At which unit of production do diminishing returns become evident? a) 1 b) 2 c) 3 d) 4

3) Accounting costs are often unsatisfactory from economists' point of view because a) they fail to allow for depreciation, or wearing out of capital assets over a period. b) accountants attempt to minimize costs to make profits look good. c) they often exclude the opportunity costs of the firm's equity capital. d) accounting procedures are designed to overstate costs in order to minimize business tax liability.

4) As output rises, marginal product eventually diminishes and a) average product becomes negative b) fixed costs increase c) total costs fall d) Marginal cost increases

5) In the short run, a firm will eventually experience rising per-unit costs because of a) economies of scale b) diseconomies of scale c) the law of supply d) the law of diminishing returns.

Answer 1

First, expand the table as follows:

Units of Output	TFC	TVC	MC
1	150	50	50
2	150	96	46
3	150	140	44
4	150	180	40

Explanation: fixed costs remain constant with output, variable costs change; marginal cost is the rate of change of total costs, as quantity changes

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Questions:

1) What is the marginal cost of producing the third unit of output?

Answer: b) $44

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2) At which unit of production do diminishing returns become evident?

Answer: d) 4

AFC continues to decline, while AVC begins to exceed AFC, MC rises

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3) Accounting costs are often unsatisfactory from economists' point of view because:

Answer: c) they often exclude the opportunity costs of the firm's equity capital.

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4) As output rises, marginal product eventually diminishes and:

Answer: d) Marginal cost increases

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5) In the short run, a firm will eventually experience rising per-unit costs because of:

Answer: d) the law of diminishing returns