Deck 13: The Costs of Production

Question 1

An entrepreneur's motivation to start a business arises from

A) an innate love for the type of business that he or she starts.
B) a desire to earn a profit.
C) an altruistic desire to provide the world with a good product.
D) All of the above could be correct.

Answer 1

D

Question 2

Economists normally assume that the goal of a firm is to earn (i)
Profits as large as possible,even if it means reducing output.
(ii)
Profits as large as possible,even if it means incurring a higher total cost.
(iii)
Revenues as large as possible,even if it reduces profits.

A) (i)and (ii)only
B) (i)and (iii)only
C) (ii)and (iii)only
D) (i), (ii),and (iii)

Answer 2

A

Question 3

A student might describe information about the costs of production as

A) dry and technical.
B) boring.
C) crucial to understanding firms and market structures.
D) All of the above could be correct.

Answer 3

D

Question 4

If Tanya sells 200 glasses of fruit punch at $0.50 each,her total revenues are

A) $100.
B) $199.50.
C) $200.
D) $400.

Question 5

Industrial organization is the study of how

A) labor unions organize workers in industries.
B) profitable firms are in organized industries.
C) industries organize for political advantage.
D) firms' decisions regarding prices and quantities depend on the market conditions they face.

Question 6

Economists in the field of industrial organization study how

A) central banking policies affect financial markets.
B) firms' demand for labor and individuals' supply of labor affect resource markets.
C) firms' decisions about prices and quantities depend on market conditions.
D) externalities and public goods affect the environment.

Question 7

Economists assume that the goal of the firm is to maximize total

A) revenue.
B) profits.
C) costs.
D) satisfaction.

Question 8

The amount of money that a firm receives from the sale of its output is called

A) total gross profit.
B) total net profit.
C) total revenue.
D) net revenue.

Question 9

To an economist,the field of industrial organization answers which of the following questions?

A) Why are consumers subject to the law of demand?
B) Why do firms experience diminishing marginal products of inputs?
C) How does the number of firms affect prices and the efficiency of market outcomes?
D) Why do firms consider production costs when determining product supply?

Question 10

Analyzing the behavior of the firm enhances our understanding of

A) what decisions lie behind the market supply curve.
B) how consumers allocate their income to purchase scarce resources.
C) how financial institutions set interest rates.
D) whether resources are allocated fairly.

Question 11

Total revenue equals

A) price x quantity.
B) price/quantity.
C) (price x quantity)- total cost.
D) output - input.

Question 12

Economists normally assume that the goal of a firm is to

A) maximize its total revenue.
B) maximize its profit.
C) minimize its explicit costs.
D) minimize its total cost.

Question 13

A student might describe information about the costs of production as

A) exciting and fresh.
B) unimportant for understanding market structure.
C) dry and technical.
D) vibrant and enthralling.

Question 14

If Darren sells 300 glasses of iced tea at $0.50 each,his total revenues are

A) $150.
B) $299.50.
C) $300.
D) $600.

Question 15

Economists normally assume that the goal of a firm is to (i)
Sell as much of its product as possible.
(ii)
Set the price of the product as high as possible.
(iii)
Maximize profit.

A) (i)and (ii)only
B) (ii)and (iii)only
C) (iii)only
D) (i), (ii),and (iii)

Question 16

Which of the following can be added to profit to obtain total revenue?

A) net profit
B) capital profit
C) operational profit
D) total cost

Question 17

Which field of economics studies how the number of firms affects the prices in a market and the efficiency of market outcomes?

A) macroeconomics
B) industrial organization
C) labor economics
D) monetary economics

Question 18

When a firm is making a profit-maximizing production decision,which of the following principles of economics is likely to be most important to the firm's decision?

A) The cost of something is what you give up to get it.
B) A country's standard of living depends on its ability to produce goods and services.
C) Prices rise when the government prints too much money.
D) Governments can sometimes improve market outcomes.

Question 19

Cody builds mailboxes.If he charges $20 for each mailbox,his total revenue will be

A) $1,000 if he sells 100 mailboxes.
B) $500 if he sells 25 mailboxes.
C) $20 regardless of how many mailboxes he sells.
D) $200 if he sells 5 mailboxes.

Question 20

Economists assume that the typical person who starts her own business does so with the intention of

A) donating the profits from her business to charity.
B) capturing the highest number of sales in her industry.
C) maximizing profits.
D) minimizing costs.

Question 21

The amount of money that a firm pays to buy inputs is called

A) total cost.
B) variable cost.
C) marginal cost.
D) fixed cost.

Question 22

Wiladee used to work as an office manager,earning $25,000 per year.She gave up that job to start a tailoring business.In calculating the economic profit of her tailoring business,the $25,000 income that she gave up is counted as part of the tailoring firm's

A) total revenue.
B) opportunity costs.
C) explicit costs.
D) marginal costs.

Question 23

An example of an opportunity cost that is also an implicit cost is

A) a lease payment.
B) the cost of raw materials.
C) the value of the business owner's time.
D) All of the above are correct.

Question 24

Zach has decided to start his own photography studio.To purchase the necessary equipment,Zach withdrew $10,000 from his savings account,which was earning 3% interest,and borrowed an additional $5,000 from the bank at an interest rate of 8%.What is Zach's annual opportunity cost of the financial capital that has been invested in the business?

A) $300
B) $400
C) $700
D) $1,650

Question 25

John has decided to start his own lawn-mowing business.To purchase the mowers and the trailer to transport the mowers,John withdrew $1,000 from his savings account,which was earning 3% interest,and borrowed an additional $2,000 from the bank at an interest rate of 7%.What is John's annual opportunity cost of the financial capital that has been invested in the business?

A) $30
B) $140
C) $170
D) $300

Question 26

Profit is defined as total revenue

A) plus total cost.
B) times total cost.
C) minus total cost.
D) divided by total cost.

Question 27

A certain firm manufactures and sells computer chips.Last year it sold 2 million chips at a price of $10 per chip.For last year,the firm's

A) accounting profit was $20 million.
B) economic profit was $20 million.
C) total revenue was $20 million.
D) explicit costs was $20 million.

Question 28

The value of a business owner's time is an example of

A) an opportunity cost.
B) a fixed cost.
C) an explicit cost.
D) total revenue.

Question 29

Trevor's Tire Company produced and sold 500 tires.The average cost of production per tire was $50.Each tire sold for a price of $65.Trevor's Tire Company's total profits are

A) $7,500.
B) $25,000.
C) $32,500.
D) $67,500.

Question 30

A firm's opportunity costs of production are equal to its

A) explicit costs only.
B) implicit costs only.
C) explicit costs + implicit costs.
D) explicit costs + implicit costs + total revenue.

Question 31

Daphne sells 300 glasses of lemonade at $0.50 each.Her total costs are $125.Her profits are

A) $25.
B) $124.50.
C) $125.
D) $150.

Question 32

Profit is defined as

A) net revenue minus depreciation.
B) total revenue minus total cost.
C) average revenue minus average total cost.
D) marginal revenue minus marginal cost.

Question 33

The Big Box corporation produced and sold 500 units of output.The average cost of production per unit was $50.Each unit sold for a price of $65.The Big Box corporation's total revenues are

A) $7,500.
B) $25,000.
C) $32,500.
D) $67,500.

Question 34

Gloria has decided to start her own snow removal business.To purchase the necessary equipment,Gloria withdrew $2,000 from her savings account,which was earning 3% interest,and borrowed an additional $4,000 from the bank at an interest rate of 7%.What is Gloria's annual opportunity cost of the financial capital that has been invested in the business?

A) $60
B) $280
C) $340
D) $660

Question 35

Billy's Bean Bag Emporium produced 300 bean bag chairs but sold only 275 of the units it produced.The average cost of production for each unit of output produced was $100.The price for each of the 275 units sold was $95.Total profit for Billy's Bean Bag Emporium would be

A) -$3,875.
B) $26,125.
C) $28,500.
D) $30,000.

Question 36

A certain firm produces and sells potato chips.Last year it sold 3 million bags of chips at a price of $3 per bag.For last year,the firm's

A) accounting profit was $9 million.
B) economic profit was $9 million.
C) total revenue was $9 million.
D) explicit costs was $9 million.

Question 37

Total cost is the

A) amount a firm receives for the sale of its output.
B) fixed cost less variable cost.
C) market value of the inputs a firm uses in production.
D) quantity of output minus the quantity of inputs used to make a good.

Question 38

The things that must be forgone to acquire a good are called

A) implicit costs.
B) opportunity costs.
C) explicit costs.
D) accounting costs.

Question 39

Trevor's Tire Company produced and sold 500 tires.The average cost of production per tire was $50.Each tire sold for a price of $65.Trevor's Tire Company's total costs are

A) $7,500.
B) $25,000.
C) $32,500.
D) $67,500.

Question 40

Joy sells 200 glasses of iced tea at $0.50 each.Her total costs are $25.Her profits are

A) $25.
B) $75.
C) $100.
D) $175.

Question 41

The amount of money that a wheat farmer could have earned if he had planted barley instead of wheat is

A) an explicit cost.
B) an accounting cost
C) an implicit cost.
D) forgone accounting profit.

Question 42

Walter used to work as a high school teacher for $40,000 per year but quit in order to start his own painting business.To invest in his painting business,he withdrew $20,000 from his savings,which paid 3 percent interest,and borrowed $30,000 from his uncle,whom he pays 3 percent interest per year.Last year Walter paid $25,000 for supplies and had revenue of $60,000.Walter asked Tyler the accountant and Greg the economist to calculate his painting business's costs.

A) Tyler says his costs are $25,900,and Greg says his costs are $66,500.
B) Tyler says his costs are $25,000,and Greg says his costs are $65,000.
C) Tyler says his costs are $66,500,and Greg says his costs are $66,500.
D) Tyler says his costs are $75,000,and Greg says his costs are $41,500.

Question 43

Bev is opening her own court-reporting business.She financed the business by withdrawing money from her personal savings account.When she closed the account,the bank representative mentioned that she would have earned $300 in interest next year.If Bev hadn't opened her own business,she would have earned a salary of $25,000.In her first year,Bev's revenues were $30,000.Which of the following statements is correct?

A) Bev's total explicit costs are $25,300.
B) Bev's total implicit costs are $300.
C) Bev's accounting profits exceed her economic profits by $300.
D) Bev's economic profit is $4,700.

Question 44

A difference between explicit and implicit costs is that

A) explicit costs must be greater than implicit costs.
B) explicit costs do not require a direct monetary outlay by the firm,whereas implicit costs do.
C) implicit costs do not require a direct monetary outlay by the firm,whereas explicit costs do.
D) implicit costs must be greater than explicit costs.

Question 45

Which of the following would be an example of an implicit cost? (i)
Forgone investment opportunities
(ii)
Wages of workers
(iii)
Raw materials costs

A) (i)only
B) (ii)only
C) (ii)and (iii)only
D) (i)and (iii)only

Question 46

Pete owns a shoe-shine business.His accountant most likely includes which of the following costs on his financial statements?

A) wages Pete could earn washing windows
B) dividends Pete's money was earning in the stock market before Pete sold his stock and bought a shoe-shine booth
C) the cost of shoe polish
D) Both b and c are correct.

Question 47

Katherine gives piano lessons for $15 per hour.She also grows flowers,which she arranges and sells at the local farmer's market.One day she spends 5 hours planting $50 worth of seeds in her garden.Once the seeds have grown into flowers,she can sell them for $150 at the farmer's market.Katherine's accounting profits are

A) $100,and her economic profits are $25.
B) $100,and her economic profits are $75.
C) $25,and her economic profits are $100.
D) $75,and her economic profits are $125.

Question 48

Pete owns a shoe-shine business.His accountant most likely includes which of the following costs on his financial statements? (i)
Shoe polish
(ii)
Rent on the shoe stand
(iii)
Wages Pete could earn delivering newspapers
(iv)
Interest that Pete's money was earning before he spent his savings to set up the shoe-shine business

A) (i)only
B) (i)and (ii)only
C) (iii)and (iv)only
D) (i), (ii), (iii),and (iv)

Question 49

Foregone investment opportunities are an example of

A) an explicit cost.
B) an implicit cost.
C) revenues.
D) profits.

Question 50

Explicit costs

A) do not require an outlay of money by the firm.
B) enter into the accountant's measurement of a firm's profit.
C) enter into the economist's measurement of a firm's profit.
D) Both b and c are correct.

Question 51

Jacqui decides to open her own business and earns $50,000 in accounting profit the first year.When deciding to open her own business,she turned down three separate job offers with annual salaries of $30,000,$40,000,and $45,000.What is Jacqui's economic profit from running her own business?

A) $-55,000
B) $-5,000
C) $5,000
D) $20,000

Question 52

Walter used to work as a high school teacher for $40,000 per year but quit in order to start his own painting business.To invest in his painting business,he withdrew $20,000 from his savings,which paid 3 percent interest,and borrowed $30,000 from his uncle,whom he pays 3 percent interest per year.Last year Walter paid $25,000 for supplies and had revenue of $60,000.Walter asked Tyler the accountant and Greg the economist to calculate his painting business's profit.

A) Tyler says his profit is $25,900,and Greg says his profit is $66,500.
B) Tyler says his profit is $35,000,and Greg says he lost $5,900.
C) Tyler says his profit is $34,100,and Greg says he lost $6,500.
D) Tyler says his profit is $34,100,and Greg says his profit is $34,100.

Question 53

An example of an explicit cost of production would be the

A) cost of forgone labor earnings for an entrepreneur.
B) lost opportunity to invest in capital markets when the money is invested in one's business.
C) lease payments for the land on which a firm's factory stands.
D) Both a and c are correct.

Question 54

Which of the following is an example of an implicit cost? (i)
The owner of a firm forgoing an opportunity to earn a large salary working for a Wall Street brokerage firm
(ii)
Interest paid on the firm's debt
(iii)
Rent paid by the firm to lease office space

A) (ii)and (iii)only
B) (i)and (iii)only
C) (i)only
D) (iii)only

Question 55

Which of the following is an example of an implicit cost?

A) salaries paid to owners who work for the firm
B) interest on money borrowed to finance equipment purchases
C) cash payments for raw materials
D) foregone rent on office space owned and used by the firm

Question 56

Explicit costs

A) require an outlay of money by the firm.
B) include all of the firm's opportunity costs.
C) include the value of the business owner's time.
D) Both b and c are correct.

Question 57

Which of the following statements is correct?

A) Assuming that explicit costs are positive,economic profit is greater than accounting profit.
B) Assuming that implicit costs are positive,accounting profit is greater than economic profit.
C) Assuming that explicit costs are positive,accounting profit is equal to economic profit.
D) Assuming that implicit costs are positive,economic profit is positive.

Question 58

Pete owns a shoe-shine business.Which of the following costs would be implicit costs? (i)
Shoe polish
(ii)
Rent on the shoe stand
(iii)
Wages Pete could earn delivering newspapers
(iv)
Interest that Pete's money was earning before he spent his savings to set up the shoe-shine business

A) (i)and (ii)only
B) (iv)only
C) (iii)and (iv)only
D) (i), (ii), (iii),and (iv)

Question 59

Implicit costs

A) do not require an outlay of money by the firm.
B) do not enter into the economist's measurement of a firm's profit.
C) are also known as variable costs.
D) are not part of an economist's measurement of opportunity cost.

Question 60

Which of the following statements is correct?

A) Opportunity costs equal explicit minus implicit costs.
B) Economists consider opportunity costs to be included in a firm's total revenues.
C) Economists consider opportunity costs to be included in a firm's costs of production.
D) All of the above are correct.

Question 61

A production function is a relationship between inputs and

A) quantity of output.
B) revenue.
C) costs.
D) profit.

Question 62

Katherine gives piano lessons for $20 per hour.She also grows flowers,which she arranges and sells at the local farmer's market.One day she spends 5 hours planting $50 worth of seeds in her garden.Once the seeds have grown into flowers,she can sell them for $150 at the farmer's market.Katherine's accounting profits are

A) $100,and her economic profits are $100.
B) $100,and her economic profits are $0.
C) $0,and her economic profits are $100.
D) $0,and her economic profits are $-100.

Question 63

Economic profit is equal to total revenue minus the

A) explicit cost of producing goods and services.
B) opportunity cost of producing goods and services.
C) accounting cost of producing goods and services.
D) implicit cost of producing goods and services.

Question 64

When calculating a firm's profit,an economist will subtract only

A) explicit costs from total revenue because these are the only costs that can be measured explicitly.
B) implicit costs from total revenue because these include both the costs that can be directly measured as well as the costs that can be indirectly measured.
C) the opportunity costs from total revenue because these include both the implicit and explicit costs of the firm.
D) the marginal cost because the cost of the next unit is the only relevant cost.

Question 65

Jane was a partner at a law firm earning $223,000 per year.She left the firm to open her own law practice.In the first year of business she generated revenues of $347,000 and incurred explicit costs of $163,000.Jane's economic profit from her first year in her own practice is

A) -$39,000.
B) $124,000.
C) $163,000.
D) $184,000.

Question 66

Tom quit his $65,000 a year corporate lawyer job to open up his own law practice.In Tom's first year in business his total revenue equaled $150,000.Tom's explicit cost during the year totaled $85,000.What is Tom's economic profit for his first year in business?

A) $0
B) $20,000
C) $65,000
D) $85,000

Question 67

Which of the following expressions is correct?

A) accounting profit = economic profit + implicit costs
B) accounting profit = total revenue - implicit costs
C) economic profit = accounting profit + explicit costs
D) economic profit = total revenue - implicit costs

Question 68

Assume a certain firm regards the number of workers it employs as variable but regards the size of its factory as fixed.This assumption is often realistic

A) in the short run but not in the long run.
B) in the long run but not in the short run.
C) both in the short run and in the long run.
D) neither in the short run nor in the long run.

Question 69

Total revenue minus only explicit costs is called

A) accounting profit.
B) economic profit.
C) average total cost.
D) implicit profit.

Question 70

The difference between accounting profit and economic profit relates to

A) the manner in which revenues are defined.
B) how marginal revenue is calculated.
C) the manner in which costs are defined.
D) the price of the good in the market.

Question 71

The difference between accounting profit and economic profit is

A) explicit costs.
B) implicit costs.
C) total revenue.
D) marginal product.

Question 72

Total revenue minus only implicit costs is called

A) accounting profit.
B) economic profit.
C) opportunity cost.
D) None of the above is correct.

Question 73

Which of the following expressions is correct?

A) accounting profit = total revenue - explicit costs
B) economic profit = total revenue - implicit costs
C) economic profit = total revenue - explicit costs
D) Both a and b are correct.

Question 74

Economic profit

A) will never exceed accounting profit.
B) is most often equal to accounting profit.
C) is always at least as large as accounting profit.
D) is a less complete measure of profitability than accounting profit.

Question 75

Total revenue minus both explicit and implicit costs is called

A) accounting profit.
B) economic profit.
C) average total cost.
D) total cost.

Question 76

A production function describes

A) how a firm maximizes profits.
B) how a firm turns inputs into output.
C) the minimal cost of producing a given level of output.
D) the relationship between cost and output.

Question 77

Accounting profit is equal to

A) marginal revenue minus marginal cost.
B) total revenue minus the explicit cost of producing goods and services.
C) total revenue minus the opportunity cost of producing goods and services.
D) average revenue minus the average cost of producing the last unit of a good or service.

Question 78

Suppose that a "doggie day care" firm uses only two inputs: hourly workers (labor)and a building (capital).In the short run,the firm most likely considers

A) both labor and capital to be fixed.
B) both labor and capital to be variable.
C) labor to be variable and capital to be fixed.
D) capital to be variable and labor to be fixed.

Question 79

Suppose that for a particular business there are no implicit costs.Then

A) accounting profit will be greater than economic profit.
B) accounting profit will be the same as economic profit.
C) accounting profit will be less than economic profit.
D) the relationship between accounting profit and economic profit cannot be determined without more information.

Question 80

Which of these assumptions is often realistic for a firm in the short run?

A) The firm can vary both the size of its factory and the number of workers it employs.
B) The firm can vary the size of its factory but not the number of workers it employs.
C) The firm can vary the number of workers it employs but not the size of its factory.
D) The firm can vary neither the size of its factory nor the number of workers it employs.