Holt 7525-9 S15_IT

average total cost. Average fixed cost always decreases as more units are produced. Average
variable cost will eventually increase as more units are produced, due to the law of diminishing
marginal returns. Average total cost will initially decrease as more units are produced, due to the
decrease in average fixed cost, but will eventually increase due to diminishing marginal returns.
A marginal cost curve will always eventually slope upward to the right due to the law of
diminishing marginal returns. A marginal cost curve will always intersect the average total cost
and average variable cost curves at their lowest points.
Questions for Chapter 20
Fill-in-the-blanks:
1. ______________________ cost is the value of the best alternative surrendered when a
choice is made.
2. ______________________ economic profit is considered to be a normal profit.
3. A ______________________ cost is a past cost that cannot be changed by current
decisions.
4. The ______________________ run is a period in which at least one input is fixed.
5. The ______________________ run is a period in which all inputs can be varied.
6. Marginal ______________________ ______________________ is the change in output
with one additional unit of input.
7. ______________________ cost is the change in total cost from producing an additional unit
of output.
8. ______________________ costs are costs that do not vary with output.
9. ______________________ costs are costs that vary with output.
10. ______________________ of scale occur when a firm’s average total cost decreases as the
scale of its operation increases.
Multiple Choice:
___ 1. Which of the following is an example of an implicit cost?
a. value of the owner’s labor devoted to the business
b. utilities expense
c. rent expense
d. All of the above
___ 2. Zero economic profit:
a. means that accounting profit is negative
b. is considered to be a normal profit
c. is the same thing as zero accounting profit
d. None of the above
___ 3. Sunk costs are:
a. past costs that cannot be changed by current decisions
b. irrelevant to current decisions
c. crucial to making current decisions
d. Both a. and b. above
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
20 - 11 Production and Costs