Deck 7: Producers in the Short Run

Question 1

The opportunity cost of any factor of production is

A) the benefit forgone by not using it in its best alternative.
B) the benefit forgone by not using it in its worst alternative.
C) the money actually paid to the factors of production.
D) its explicit cost.
E) its accounting cost.

Answer 1

A

Question 2

The table below provides the total revenues and costs for a small landscaping company in a recent year. Total Costs ($) TABLE 7-2
Refer to Table 7-2.

A) $800.
B) $31 200.
C) $30 800.
D) $400.
E) $30 400.

Answer 2

B

Question 3

The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When
answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. TABLE 7-4
Refer to Table 7-4. Average variable costs for 175 units of output is approximately

A) 25 cents.
B) 32 cents.
C) 43 cents.
D) 57 cents.
E) $1.00.

Answer 3

C

Question 4

A family of short-run cost curves shows how

A) the quality of the fixed factor depreciates over time.
B) technology is continuously changing.
C) each curve is associated with a different quantity of the fixed factor.
D) cost remains constant regardless of the factors used in production.
E) cost curves are always upward sloping.

Question 5

The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. TABLE 7-4
Refer to Table 7-4. Diminishing marginal productivity of labour is first observed when the firm changes the amount of labour hired from

A) 0 to 1 unit.
B) 1 to 2 units.
C) 2 to 3 units.
D) 3 to 4 units.
E) 4 to 5 units.

Question 6

The diagram below shows some short-run cost curves for a firm. FIGURE 7-2
Refer to Figure 7-2. Which of the following choices correctly identifies the cost curves in part (i) ofthe figure?

A) Curve 1 is the total cost curve. Curve 2 is the total variable cost curve.
Curve 3 is the average fixed cost curve.
B) Curve 1 is the total cost curve. Curve 2 is the total variable cost curve.
Curve 3 is the total fixed cost curve.
C) Curve 1 is the total marginal cost curve. Curve 2 is the total average cost curve.
Curve 3 is the total average fixed cost curve.
D) Curve 1 is the total fixed cost curve. Curve 2 is the total variable cost curve.
Curve 3 is the total cost curve.
E) Curve 1 is the total variable cost curve. Curve 2 is the total cost curve.
Curve 3 is the total fixed cost curve.

Question 7

Choose the one alternative that best completes the statement or answers the question.
The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. TABLE 7-4
Refer to Table 7-4. The marginal product of labour is at its maximum when the firm changes theamount of labour hired from

A) 0 to 1 unit.
B) 1 to 2 units.
C) 2 to 3 units.
D) 3 to 4 units.
E) 4 to 5 units.

Question 8

A firm's short-run marginal cost curve is decreasing when

A) capacity is reached.
B) marginal product is decreasing.
C) marginal product is increasing.
D) average fixed cost is decreasing.
E) total fixed cost is decreasing.

Question 9

The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When
answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. TABLE 7-4
Refer to Table 7-4.hired. Average product of labour begins decreasing with the unit of labour hired.

A) 4th; 5th
B) 3rd; 4th
C) 4th; 3rd
D) 3rd; 2nd
E) 2nd; 3rd

Question 10

A firm's capacity is defined as the level of output where

A) short-run average total cost is at its minimum.
B) the upper limit on what can be produced is reached.
C) average total cost is at its maximum.
D) average fixed costs are at a minimum.
E) marginal cost equals average variable cost.

Question 11

When a firm's marginal cost is rising, we know that

A) average total cost must be rising.
B) marginal product must be falling.
C) average variable cost must be rising.
D) average fixed cost must be rising.
E) marginal product must be zero.

Question 12

The opportunity cost of money that a firm's owner has invested in the firm is an example of

A) explicit costs.
B) direct production costs.
C) sunk costs.
D) implicit costs.
E) accounting costs.

Question 13

Suppose a firm is producing 100 units of output, incurring a total cost of $10 000 and total variable cost of $6000. It can be concluded that average fixed cost is

A) $40.
B) $60.
C) $100.
D) $160.
E) $4000.

Question 14

A limited partnership differs from an ordinary partnership by

A) having unlimited liability for all partners.
B) having a limited number of partners.
C) including some partners whose liability is restricted to the amount that they invested in the firm.
D) having limited liability of all partners.
E) having a limited number of partners, each with limited liability.

Question 15

Which of the following statements is NOT true of a corporation?

A) It can incur debt that is an obligation of the corporation but not of its individual owners.
B) It has the right to sue and be sued.
C) It is an entity separate from the individuals who own it.
D) It is legally obliged to distribute all profits to shareholders.
E) It can enter into contracts.

Question 16

Suppose that when one additional unit of labour is hired, total product increases from 100 to 110units of output per month. Marginal product must therefore be

A) constant.
B) positive.
C) zero.
D) decreasing.
E) increasing.

Question 17

Marginal cost is defined as the

A) cost of an additional unit of a variable factor of production.
B) change in fixed cost resulting from an additional unit of output.
C) cost per unit when the firm is operating at capacity.
D) difference between average total cost and average variable cost.
E) change in total cost resulting from an additional unit of output.

Question 18

Which one of the following types of cost declines over the whole range of output?

A) marginal cost
B) average variable cost
C) total fixed cost
D) average fixed cost
E) total variable cost

Question 19

Which of the following statements describes an advantage to the owner of a single proprietorship?

A) The owner's liability is limited to the amount he or she actually invests in the firm.
B) Shares of the firm can be traded on any stock exchange.
C) The owner can readily maintain full and complete control over every aspect of the firm's operation.
D) He or she has limited liability.
E) The firm has a legal existence separate from its owner.

Question 20

The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When
answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. TABLE 7-4
Refer to Table 7-4. The total fixed cost of producing 305 units of output is

A) $100.
B) $125.
C) $112.50.
D) $225
E) $305.

Question 21

Refer to Table 7-2.

A) $31 200.
B) $63 500.
C) $32 700.
D) $33 500.
E) $32 300.

Question 22

Which of the following factors of production is most likely to be variable in the short run?

A) land
B) entrepreneurship
C) capital equipment
D) labour
E) technology

Question 23

Consider a firm in the short run. Average product is at its maximum when

A) the maximum quantity of the variable input is employed.
B) diminishing returns cease to operate.
C) average product equals marginal product and marginal product is falling.
D) marginal product is maximized.
E) total product is maximized.

Question 24

Which of the following is most likely a long-run decision for a firm?

A) The amount of inventory to stock.
B) The price at which to sell the product.
C) The hours a store should stay open.
D) How many warehouses to build.
E) The number of workers to hire.

Question 25

Suppose a firm's fixed costs are $100 and average variable costs are constant regardless of output.Which of the following is then true?

A) Average total cost will decrease when output is increased.
B) Average total costs will be constant.
C) Marginal cost will be less than average variable cost.
D) Marginal cost will be rising as output rises.
E) Marginal cost will equal average total cost.

Question 26

The period of time over which the firm can vary any of its inputs for a given production technologyis called the

A) very-short run.
B) short run.
C) long run.
D) very-long run.
E) immediate run.

Question 27

With regard to economic decision making for firms, the short run is

A) a period over which the quantities of all factors of production and technology are variable.
B) a definite number of months.
C) a period over which the quantity of at least one significant factor of production is fixed.
D) less than one year.
E) a period over which the quantities of all factors of production are variable but technology is fixed.

Question 28

An example of "real" capital is

A) a firm's computer systems.
B) corporate bonds.
C) shares in a corporation.
D) a firm's retained earnings.
E) a firm's balance in a bank account.

Question 29

Jodi recently went into business producing widgets. Which of the following would be a fixed cost for her firm?1. labour costs are $1000 per month2. raw material costs are $5000 per month3. a one-year lease on a building is $12 000

A) 1 only
B) 2 only
C) 3 only
D) 1 and 2
E) 2 and 3

Question 30

In the short run, the firm's product curves show

A) TP is at its maximum when MP is at its maximum.
B) when MP < AP, AP is increasing.
C) AP is at its minimum when MP = AP.
D) when the MP curve cuts the AP curve from above, the AP curve begins to fall.
E) TP begins to decrease when AP begins to decrease.

Question 31

The opportunity cost to a firm of using an asset is zero if

A) no money was spent to acquire the asset.
B) the asset has no alternative uses.
C) the asset was given to the firm for free.
D) the asset has zero sunk costs associated with it.
E) the asset is already owned by the firm.

Question 32

Consider a firm in the short run. If the AP curve is rising, then the MP curve

A) must be falling.
B) must lie above the average-product curve over this range and must also be rising.
C) can be either above or below the average-product curve, although it must be rising over the entire range.
D) must lie above the average-product curve over this range.
E) must lie below the average-product curve over this range.

Question 33

Economists use the notation Q = f(L,K) to describe

A) the technological relationship between the inputs that a firm uses and the outputs that it produces.
B) the flow of labour (L) and capital (K) services that are available when output is (Q).
C) the arithmetic relationship between the outputs that a firm uses and the inputs that it produces.
D) the financial relationship between the inputs that a firm uses and the outputs that it produces.
E) the level of output (Q) required to fully employ labour (L) and capital (K).

Question 34

If a firm uses factor inputs that are personally owned by the firm's owner, then economists refer to the opportunity cost of these inputs as

A) sunk costs.
B) direct production costs.
C) implicit costs.
D) inverted costs.
E) accounting costs.

Question 35

In the short run, when capital is a fixed factor, a rise in the cost of labour

A) shifts the AVC curve down.
B) shifts the marginal cost curve upwards.
C) leaves the ATC curve unchanged.
D) leaves the MC curve unchanged.
E) shifts the total product curve downwards.

Question 36

The point of diminishing marginal productivity is the point where

A) the total product begins to fall.
B) marginal product has reached its maximum.
C) the marginal product curve lies below the average product curve.
D) average product has reached its maximum.
E) the marginal product begins to fall at an increasing rate.

Question 37

In the short run, total fixed costs

A) decrease and then increase as output increases.
B) are equal to total variable costs.
C) increase and then decrease as output increases.
D) do not vary with output.
E) decrease as output increases.

Question 38

A single proprietorship is a form of business organization which

A) has unlimited access to money capital.
B) has a single owner but has directors who are responsible for the firm's debts.
C) allows easy transferability of ownership by the trading of shares.
D) has limited liability.
E) has one owner-manager who is personally responsible for the firm's actions and debts.

Question 39

The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume that the wage per unit of labour is $10 and the cost of the capital is $50. TABLE 7-3
Refer to Table 7-3. The average total cost for 150 units of output is approximately

A) 40 cents.
B) 67 cents.
C) $1.50.
D) 80 cents.
E) 33 cents.

Question 40

When a firm's total-product curve is increasing at a decreasing rate

A) the marginal-product curve lies below the average-product curve.
B) average product is falling.
C) marginal product is positive but declining.
D) marginal product is negative and decreasing.
E) average product is zero.

Question 41

A firm that has two or more owners who share decision-making power as well as the firm's profitsis called

A) a joint-stock company.
B) a corporation.
C) a single proprietorship.
D) a non-profit organization.
E) a partnership.

Question 42

The diagram below shows some short-run cost curves for a firm. FIGURE 7-2
Refer to Figure 7-2. Which of the following choices correctly identifies the cost curves in part (ii) of the figure?

A) Curve 4 is the average total cost curve. Curve 5 is the marginal cost curve.
Curve 6 is the average variable cost curve. Curve 7 is the average fixed cost curve.
B) Curve 4 is the marginal cost curve. Curve 5 is the average total cost curve.
Curve 6 is the average variable cost curve. Curve 7 is the average fixed cost curve.
C) Curve 4 is the marginal cost curve. Curve 5 is the average variable cost curve.
Curve 6 is the average fixed cost curve. Curve 7 is the average total cost curve.
D) Curve 4 is the marginal cost curve. Curve 5 is the average fixed cost curve.
Curve 6 is the average variable cost curve. Curve 7 is the average total cost curve.
E) Curve 4 is the average fixed cost curve. Curve 5 is the average total cost curve.
Curve 6 is the marginal cost curve.
Curve 7 is the average variable cost curve.

Question 43

Suppose a firm producing digital cameras is operating such that marginal costs are higher than average costs. If the firm produces one more camera, average costs will

A) rise.
B) reach a point of diminishing returns.
C) fall.
D) reach their maximum.
E) remain constant.

Question 44

It is assumed in standard economic theory that a firm makes decisions in an effort to

A) become as large as possible.
B) have a highly diversified product.
C) maximize its profits.
D) maximize its revenue.
E) be favoured politically.

Question 45

The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. TABLE 7-4
Refer to Table 7-4. The total variable cost of producing 305 units of output is

A) $100.
B) $125.
C) $225.
D) $305.
E) $325.

Question 46

Which of the following items is part of a firm's financial capital as distinct from its real capital?

A) a $500 000 balance in a bank account
B) a fleet of delivery trucks
C) a network of personal computers
D) inventory of goods valued at $1 000 000
E) a new bulldozer

Question 47

The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume that the wage per unit of labour is $10 and the cost of the capital is $50. TABLE 7-3
Consider a house-construction firm with fixed capital. The firm can build 8 houses per year with16 workers and 8.8 houses per year with 17 workers. If it is currently building 8.8 houses per year,which of the following is true?

A) The firm has not yet reached the point of diminishing marginal productivity.
B) The firm has already passed the point of diminishing marginal productivity.
C) Average product is at a maximum with 16 workers.
D) Average product is at a maximum with 17 workers.
E) The marginal product is below the average product.

Question 48

The choices listed below involve costs to the firm. For which is the implicit cost potentially different than its explicit cost?

A) The use of firm-owned assets.
B) The use of rented land.
C) The services of hired workers.
D) The purchase of raw materials used in production.
E) The interest paid on borrowed money.

Question 49

The period of time over which at least one factor of production is fixed is called the

A) very-short run.
B) short run.
C) long run.
D) very-long run.
E) immediate run.

Question 50

The relationship between factors of production used in the production process and the resulting output is called a(n)

A) economic function.
B) production function.
C) production boundary.
D) cost function.
E) consumption possibilities boundary.

Question 51

In the short run, if average total cost is increasing as output rises, then

A) marginal cost must be below average total cost.
B) average total cost is no longer equal to the sum of average variable cost and average fixed cost.
C) average variable cost must be increasing.
D) average fixed costs must be increasing.
E) total fixed costs must be increasing.

Question 52

The vertical distance between the total cost curve and the total variable cost curve is

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

Question 53

Consider a firm in the short run. When the total-product curve is increasing at an increasing rate

A) marginal product is positive but declining.
B) average product is falling.
C) the marginal-product curve lies below the average-product curve.
D) marginal product is positive and increasing.
E) average product is zero.

Question 54

Consider a firm in the short run. If total product is at its maximum, then

A) average product must be falling and be equal to zero.
B) marginal product must be greater than zero and must be falling.
C) average product must equal marginal product.
D) marginal product must be falling and be equal to zero.
E) average product must be rising and must lie above marginal product.

Question 55

A firm that maximizes its profits by producing a certain level of output must also

A) minimize its cost of producing that output.
B) maximize its output.
C) minimize its variable costs.
D) maximize its sales.
E) maximize its revenue.

Question 56

The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. TABLE 7-4
Average, marginal, and total product curves

A) demonstrate that, in the short run, all inputs are variable.
B) express relationships between physical inputs and physical outputs.
C) relate the prices of inputs (factors of production) to the prices of products.
D) demonstrate that each of these measures of output increase as more inputs are applied.
E) relate the price of output to the quantity supplied.

Question 57

The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume that the wage per unit of labour is $10 and the cost of the capital is $50. TABLE 7-3
Refer to Table 7-3.

A) $1.67.
B) $10.00.
C) $1.00.
D) 50 cents.
E) 16.7 cents.

Question 58

Refer to Figure 7-1. If the firm hires the 15th unit of labour,

A) the extra output will be zero.
B) average product will fall.
C) marginal product will be unchanged.
D) the firm will reach its capacity.
E) both A and B are correct.

Question 59

When a corporation issues a bond

A) it is called equity capital.
B) it is making a promise to pay interest each year but not repay the principal.
C) it is making a promise to pay interest each year and to repay the principal at a stated time in the future.
D) it is called financing through the stock market.
E) the purchaser of the bond assumes ownership rights in the corporation.

Question 60

A firm's depreciation costs

A) are an estimate of the loss of value of the firm's physical capital.
B) are the cost of money borrowed to buy a durable asset.
C) measure payments to those outside the firm.
D) are irrelevant to an accounting of the firm's total costs.
E) are a measure of the depreciation of financial assets of the firm.

Question 61

An example of debt financing for any form of business organization is

A) buying back bonds.
B) borrowing from a bank.
C) issuing new stock.
D) buying back previously issued stock.
E) using undistributed profits.

Question 62

The law of diminishing returns states that if increasing quantities of a variable factor are applied to a given quantity of fixed factors, then

A) the AP will eventually decrease, but only if TP is held constant.
B) TP will eventually begin to fall.
C) the MP will eventually decrease with constant AP.
D) the MP and the AP of the variable factor will eventually decrease.
E) the AP will eventually decrease with constant MP.

Question 63

The equation Q = 0.5KL - (0.4)L + 2L2 is an example of

A) a factor of production equation.
B) an arithmetic expression of output quantities.
C) a technological change equation.
D) a production function.
E) an economic input function.

Question 64

The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume that the wage per unit of labour is $10 and the cost of the capital is $50. TABLE 7-3
A firm can raise financial capital without incurring debt by issuing new shares and/or

A) issuing bonds.
B) making extra dividend payments.
C) increasing its bank loans.
D) reinvesting profits.
E) investing in new capital equipment.

Question 65

If increasing quantities of a variable factor are applied to a given quantity of fixed factors, then the law of diminishing returns tells us that

A) total product will eventually begin to fall.
B) the marginal product will eventually decrease with constant average product.
C) the marginal product and the average product of the variable factor will eventually decrease.
D) the average product will eventually decrease, but only if total product is held constant.
E) the average product will eventually decrease with constant marginal product.

Question 66

The table below provides the annual revenues and costs for a family-owned firm producing catered meals. TABLE 7-1
Refer to Table 7-1. The accounting profits for this family-owned firm are

A) $0
B) $10 000
C) $30 000
D) $500 000
E) -$15 000

Question 67

If Michelle used $1000 from her savings account, which was paying 6 percent interest annually, to invest in her brother's new sporting-goods store, the opportunity cost of her investment on an annual basis would be

A) her share of the store's profits.
B) $60.
C) $1060.
D) $1000.
E) the dividend paid to her by her brother.

Question 68

The period of time over which all factors of production and technology are variable is known as the

A) very-short run.
B) short run.
C) long run.
D) very-long run.

Question 69

Which of the following statements about the relationship between marginal product and average product is correct?

A) When average product exceeds marginal product, marginal product must be rising.
B) When marginal product is falling, average product is falling.
C) When marginal product exceeds average product, average product must be rising.
D) Average product equals marginal product when marginal product is at its maximum.
E) Average product equals marginal product at marginal product's lowest point.

Question 70

The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. TABLE 7-4
Refer to Table 7-4. The total cost of producing 175 units of output is

A) $75.
B) $100.
C) $150.
D) $175.
E) $350.

Question 71

Suppose a firm is producing 500 units of output, incurring a total cost of $700 000 and total fixed cost of $100 000. It can be concluded that average variable cost is

A) $1200.
B) $1600.
C) $600.
D) $1400.
E) $200.

Question 72

Suppose a production function for a firm takes the following algebraic form: Q = 2KL - (0.2)L2, where Q is the output of sweaters per day. Now suppose the firm is operating with 8 units ofcapital (K=8) and 10 units of labour (L=10). What is the output of sweaters?

A) 30 sweaters per day
B) 60 sweaters per day
C) 80 sweaters per day
D) 140 sweaters per day
E) 155 sweaters per day

Question 73

In the short run, the firm's product curves show

A) TP is at its maximum when MP = O.
B) AP is at its minimum when MP = AP.
C) when MP > AP, AP is decreasing.
D) TP begins to decrease when AP begins to decrease.
E) when the MP curve cuts the AP curve from below, the AP curve begins to fall.

Question 74

We can predict that resources will move into an industry whenever

A) economic profits for firms in that industry are greater than zero.
B) accounting profits for firms in that industry are greater than zero.
C) economic profits for firms in that industry are zero.
D) accounting profits for firms in that industry are zero.
E) economic losses for firms in that industry are minimized.

Question 75

The theory of the firm is based on the following two key assumptions:

A) Each firm has a highly diversified product, and this leads to profit maximization.
B) Firms seek to maximize profit, and to distribute the maximum value in dividends.
C) Firms seek to maximize revenues, and to maximize undistributed profits.
D) Firms seek to maximize profits, and the firm is a single, consistent decision-making unit.
E) Firms seek to become as large as possible, and they seek to maximize total revenue.