Average total cost is equal to
a. total cost divided by the number of workers.
b. marginal cost plus variable cost.
c. average fixed cost minus average variable cost.
d. total cost divided by the quantity of output produced.

23) Adam spent $10,000 on new equipment for his small business, “Adam’s Fitness Studio.” Membership at his fitness center is very low and at this rate, Adam needs an additional $12,000 per year to keep his studio open. Which of the following is true?
a. The variable cost of running the studio is $22,000.
b. The fixed cost of running the studio is $22,000.
c. The $10,000 Adam spent on equipment is the total cost of starting the business and the $12,000 he’ll need to continue operations is a marginal cost.
d. The $10,000 Adam spent on equipment is a fixed cost of business and the $12,000 he’ll need to continue operations is a variable cost.

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24) Long run average cost curves are U-shaped because
a. of the law of diminishing returns.
b. of the law of demand.
c. of economies and diseconomies of scale.
d. of the law of supply.
25) Manufacturers of flat-panel televisions expect continued rapid increases in the demand for their products. In response to this forecast, manufacturers are building increasingly larger plants. At the same time, they expect to sell flat-panel televisions at lower prices. Which of the following must be true if manufacturers plan to lower prices and yet expect to cover the average cost of production in their larger plants?
a. They expect that the demand for flat-panels televisions is relatively elastic and therefore lowering prices will lead to an increase in total revenue which will comfortably cover the cost of production.
b. The cost of building a larger plant must be lower than the cost of building smaller plants.
c. Larger plants are more efficient than smaller plants because the bulk of the cost of production is fixed costs.
d. They expect that economies of scale will make the cost of production in the larger plants lower than the cost of production in the smaller plants.

Unit 3 Examination

Multiple Choice Questions (Enter your answers on the enclosed answer sheet)
1) “Between 1997 and 2001, many apple farmers switched from traditional to organic
growing methods, increasing production of organically grown apples from 1.2 million
boxes per year to more than 3 million boxes.” If the market for organic apples is per-
fectly competitive, which of the following statements is inconsistent with the state-
ment above?
a. Organic apple farmers earned short-run economic profits between 1997 and 2001.
b. The price of organic apples is likely to rise over time as more and more farmers switch
to organic methods of farming.
c. The additional supply of organic apples resulted in a lower price for organic apples.
d. It is relatively easy to enter the organic apples market.

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