Question

1. Suppose Bev's Bags makes two kinds of handbags—large and small. Bev rents an industrial space where she keeps the fabric, the industrial sewing machine, her measuring board and cutting shears, extra needles, thread and buttons, and labels. If Bev were to produce no bags, which of the following is true regarding Bev's costs?

a. The fixed cost of thread would stay the same.

b. The variable cost of cutting shears would drop to zero.

c. All are correct.

d. The variable cost of fabric would drop to zero.

2. When economic profits are negative, accounting profits could be:

a. positive

b. negative

c. all of these are possible

d. zero

3. When marginal product __________ average product, average product must be ______________.

a. is greater than; increasing

b. is greater than; decreasing

c. is less than; increasing

d. Any of these is possible.

4. The total cost curve:

a. All are correct.

b. is the sum of the variable cost curve and fixed cost curve.

c. is always above the variable cost curve.

d. is parallel to the variable cost curve.

Answer 1

1. c. All are correct

Fixed cost remains constant throughout the level of production and variable cost would be zero at zero level of output.

2. c. All of these are possible

Accounting profit could be positive, negative, or zero.

3. a. is greater than; increasing

• When marginal product is greater than average product, average product is increasing.
• When marginal product is less than average product, average product is decreasing.

4. a. All are correct

Total cost = Variable cost + Fixed cost

Total cost is parallel to the variable cost curve and it is above the variable cost curve.