Question

1. Explicit costs include:

a. variable costs.

b. fixed costs.

c. out-of-pocket costs.

d. All of these are included in explicit costs.

2. Costs that are "fixed":

a. None are correct.

b. are those that will never change.

c. vary with output, but not with resource prices.

d. depend on what timescale you are thinking.

3. Suppose Larry's Lariats produces lassos in a factory, and uses nine feet of rope to make each lasso. The rope is put into a machine that automatically cuts it to the right length, then seals the ends to prevent fraying. The rope is then hand tied, dipped, and wound before being placed in a packaging machine to prepare it for retail sale. Which of the following would be considered a fixed cost for this company?

a. The cost of rope

b. The packaging material

c. None of these would be considered a fixed cost.

d. Employee wages

4. Economies of scale refers to when:

a. average total cost does not depend on the quantity of output in the long run.

b. an increase in the quantity of output increases average total cost in the long run.

c. None are correct.

d. an increase in the quantity of output decreases average total cost in the long run.

Answer 1

(1) (d)

Explicit cost is any cost which has actually been incurred and paid.

(2) (d)

Fixed costs do not change over a range of output, but this range varies on time scale.

(3) (c)

All costs given depend on output produced, so are variable.

(4) (d)

When increase in output decreases long run ATC, there are economies of scale and ATC curve slopes downward.