Deck 9: Decision Making by Individuals and Firms

Question 1

Money that must be paid for the use of factors of production such as labor and capital is an:
A.explicit cost.
B.accounting profit.
C.implicit cost.
D.economic profit.

Answer 1

explicit cost.

Question 2

Suppose a local hardware store has explicit costs of $2 million per year and implicit costs of
$44,000 per year.If the store earned an economic profit of $50,000 last year, this means that the store's accounting profit equaled:
A.$94,000.
B.$6,000.
C.$2,050,000.
D.$2,044,000.

Answer 2

$94,000.

Question 3

Part of the associated with the Chicago Cubs baseball team is the value of batting
cages.
A.labor
B.land
C.capital
D.entrepreneurship

Answer 3

capital

Question 4

In central Florida, the demand for real estate has been increasing rapidly for years.This reality, in combination with occasional freezes that kill orange trees, has led many orange grove owners to sell their land to real estate developers.Because of the freezes and land demand, the ________
cost of capital is in central Florida's orange groves.
A.explicit; decreasing
B.implicit; increasing
C.implicit; decreasing
D.explicit; increasing

Question 5

After earning your BA, you have to decide whether to accept the offer of a job that will pay you
$45,000 per year or spend an additional two years earning an MBA.If you decide to pursue the graduate degree, your annual expenses for tuition, books, board, and lodging will be $32,000.You have been offered a scholarship for $10,000 per year, but in order to pay the remaining $22,000 per year, you would have to cash in savings bonds that your grandparents have given you that have been earning $500 in interest per year.The annual opportunity cost of earning your MBA is:
A.$67,500.
B.$77,000.
C.$99,000.
D.$77,500.

Question 6

You own a small deli that sells sandwiches, salads, and soup to the community.Which of the following is an implicit cost of the business?
A.wages paid to part-time employees
B.the job offer you did not accept at a local catering service
C.bread, meat, and vegetables used to produce the items on your
menu
D.your monthly utility bill

Question 7

Suppose the Chicago Cubs could rent out Wrigley Field (the field the players play on) to local youth leagues for $11,000 per month.The $11,000 per month reflects the of capital.
A.implicit cost
B.explicit cost
C.direct cost
D.total cost

Question 8

Suppose a local floral shop has explicit costs of $200,000 per year and implicit costs of $50,000 per year.If the store earned an economic profit of $50,000 last year, this means that the store's accounting profit equaled:
A.$10,000.
B.$50,000.
C.$100,000.
D.$200,000.

Question 9

Accounting profit differs from economic profit because:
A.of differences in the manner in which revenue is calculated.
B.economic costs include depreciation, while accounting costs do not.
C.accounting costs are generally higher than economic costs because accounting costs include explicit and implicit costs, while economic costs include only explicit costs.
D.economic costs are generally higher than accounting costs because economic costs include all opportunity costs, while accounting costs include explicit costs only.

Question 10

For most firms, economic profit is:
A.less than accounting profit.
B.equal to accounting profit.
C.greater than accounting profit.
D.negative.

Question 11

Sarah's accountant tells her that she made a profit of $43,002 running a pottery studio in Orlando.Sarah's husband, an economist, claims Sarah lost $43,002 running her pottery studio.This means her husband is claiming that she incurred ________ in costs.
A.$86,004; implicit
B.$43,002; implicit
C.$43,002; explicit
D.$86,004; explicit

Question 12

Accountants use only costs in their computations of cost.
A.opportunity
B.implicit
C.explicit
D.variable

Question 13

Which of the following statements about opportunity cost is not true?
A.Opportunity cost may be larger than monetary cost.
B.Opportunity cost includes both explicit and implicit costs.
C.The real or opportunity cost of something is what you must give up to get it.
D.Opportunity cost is synonymous with explicit costs.

Question 14

Profit computed using explicit costs as the only measure of costs is:
A.explicit profit.
B.accounting profit.
C.implicit profit.
D.economic profit

Question 15

Costs that are included in the economic concept of cost but that are not explicit costs are:
A.outlay costs.
B.accounting profits.
C.implicit costs.
D.economic profits.

Question 16

Expenses associated with factors of production may be:

A)implicit costs.
B)opportunity costs.
C)explicit costs.
D)implicit costs, opportunity costs, or explicit costs.

Question 17

The implicit cost of capital is:
A.the explicit cost of capital that the firm might have used but didn't need to.
B.depreciation.
C.the opportunity cost of the capital used by a business.
D.the cost of human capital.

Question 18

Jacquelyn is a student at a major state university.Which of the following is not an example of an explicit cost of her attending college?
A.tuition
B.textbooks
C.the salary that she could have earned working full-time
D.computer lab fees

Question 19

If the accounting profit for a firm is negative:
A.the economic profit must be positive
B.the economic profit must be negative.
C.the firm should produce more.
D.the firm will not owe any taxes to the government.

Question 20

The implicit cost of capital is:
A.the expense associated with leasing machines.
B.the expense associated with buying machines.
C.the opportunity cost of capital used by a business.
D.irrelevant for determining economic profit.

Question 21

Scenario: Accounting and Economic Profit
Rather than put the $100,000 that his grandmother left him in a mutual fund that earns 5% each year, Tommy Wang quit his job that paid $60,000 per year and started Wang's Wicker Furniture Store.He rented a showroom for $15,000 for the year, purchased capital equipment that depreciates $5,000 each year, purchased $60,000 in wicker furniture, and incurred costs of $40,000 for sales help and advertising.Instead of using the capital for his own business he could rent it to a rival firm and earn
$5,000 a year, In his first year, his revenue was $150,000.
(Scenario: Accounting and Economic Profit) The implicit cost of capital for Wang's Wicker Furniture Store is:
A.$0.
B.$2,000.
C.$5,000.
D.$50,000.

Question 22

Scenario: Accounting and Economic Profit
Rather than put the $100,000 that his grandmother left him in a mutual fund that earns 5% each year, Tommy Wang quit his job that paid $60,000 per year and started Wang's Wicker Furniture Store.He rented a showroom for $15,000 for the year, purchased capital equipment that depreciates $5,000 each year, purchased $60,000 in wicker furniture, and incurred costs of $40,000 for sales help and advertising.Instead of using the capital for his own business he could rent it to a rival firm and earn
$5,000 a year, In his first year, his revenue was $150,000.
(Scenario: Accounting and Economic Profit) The accounting profit of Wang's Wicker Furniture Store is:
A.$200,000.
B.$60,000.
C.$30,000.
D.$0.

Question 23

Profit computed using explicit costs as the only measure of costs is:
A.explicit profit.
B.accounting profit.
C.implicit profit.
D.economic profit.

Question 24

In making an "either-or" decision
A.choose the activity that results in the greater economic profit.
B.choose the activity that results in the greater accounting profit.
C.continue in an activity as long as the marginal cost is greater than the marginal benefit.
D.continue in an activity as long as the marginal cost is less than the marginal benefit.

Question 25

The costs economists use in the concept of economic profit are:
A.accounting costs.
B.strictly dollar costs, not opportunity costs.
C.opportunity costs, or the value of the best opportunity forgone.
D.accounting costs and opportunity costs (i.e., the value of the best opportunity forgone).

Question 26

The dormitories of Eastland College are part of its:
A.land.
B.labor.
C.capital.
D.explicit costs.

Question 27

Until recently Rosemarie worked as an accountant, earning $30,000 annually.Then she inherited a piece of commercial real estate that had been renting for $12,000 annually.Rosemarie decided to leave her job and operate a Peruvian restaurant in the space she inherited.At the end of the first year, her books showed total revenues of $260,000 and total costs of $230,000 for food, utilities, cooks, and other supplies.Her economic profit at the end of one year is:
A.$230,000.
B.$30,000.
C.$0.
D.-$12,000.

Question 28

Which of the following is a "how much" decision?
A.Mary is trying to decide whether to go to work or go to college after she graduates from high school next month.
B.Andrea is trying to decide whether to go to graduate school in economics or go to law school.
C.Tim is trying to decide the amount of money to save each month in order to buy a new car next year.
D.Andy is trying to decide whether to take a prep course for the Law School Admissions Test.

Question 29

Bessie wants to calculate the accounting and economic profits on her cattle farm in Nebraska.She pays $30,000 per year for the cost of raising cattle, $80,000 in wages, and $20,000 in insurance.she forgoes $30,000 per year that she could make as a teacher.If her total revenue equals
$140,000, that means her accounting profit is ________ and her economic profit is _.
A.$10,000; -$20,000
B.$30,000; -$30,000
C.-$10,000; -$10,000
D.$60,000; $30,000

Question 30

Accountants use only costs in their computations of short-run total cost.
A.Opportunity
B.implicit
C.explicit
D.variable

Question 31

During its only year of operation, a firm collected $175,000 in revenue and spent $50,000 on raw materials, labor, and utilities.The owners of the firm spent $100,000 of their own money to build the firm's factory (instead of buying bonds and earning a 10% annual rate of return), which they sold at the end of the year for $100,000.The firm's economic profit is:
A.$35,000.
B.$125,000.
C.$115,000.
D.$25,000.

Question 32

Profit is the difference between ________ and _.
A.total sales; total revenues
B.total profits; total costs
C.total revenues; total costs
D.marginal costs; marginal revenues

Question 33

George owns a gun range in Texas.He pays $32,000 per year in insurance, $408,000 in wages, and $23,000 in supplies.he forgoes $32,000 per year he could make as a police officer.His total revenue last year equaled $460,000.That means his economic ________ equaled _.
A.profit; $3,000
B.losses; $3,000
C.losses; $35,000
D.profit; $35,000

Question 34

Which of the following is true of the relationship between accounting profit and economic profit?
A.Economic profit is less than accounting profit if implicit costs exist.
B.Economic profit is always equal to accounting profit.
C.Economic profit is greater than accounting profit if implicit costs exist.
D.Economic profit is less than accounting profit if implicit costs are zero.

Question 35

You decide to quit your $60,000 per year job as an information technology specialist and illustrate children's books.At the end of the first year of illustrating, you have earned $20,000.You also spent
$5,000 for paint and paper.Your economic profit in the first year as an illustrator is:
A.$15,000.
B.$20,000.
C.-$40,000.
D.-$45,000.

Question 36

Suppose Eastland College does not have a summer program and could rent out the campus to various summer sports camps for $100,000.The potential revenue of the summer camps represents:
A.an implicit cost of capital.
B.an explicit cost.
C.a total cost.
D.a sunk cost.

Question 37

Which of the following is an "either-or" decision?
A.Allen must decide how many courses to take this semester.
B.Sally must decide how many hours to spend studying for each of the four courses that she is taking this semester.
C.Chris must decide how many hours to work each week at his part-time job.
D.Dylan must decide whether to major in economics or finance.

Question 38

Which of the following best describes a "how much" decision?
A.Should I drive to work or ride my bicycle?
B.Should I rent a movie or watch a baseball game on television?
C.Should I attend graduate school or immediately enter the labor force?
D.Should I buy a third hot dog?

Question 39

An "either-or" decision involves
A.deciding how much of an activity to do.
B.a choice between two activities.
C.calculating marginal costs for each activity.
D.calculating the marginal benefits for each activity.

Question 40

Scenario: Accounting and Economic Profit
Rather than put the $100,000 that his grandmother left him in a mutual fund that earns 5% each year, Tommy Wang quit his job that paid $60,000 per year and started Wang's Wicker Furniture Store.He rented a showroom for $15,000 for the year, purchased capital equipment that depreciates $5,000 each year, purchased $60,000 in wicker furniture, and incurred costs of $40,000 for sales help and advertising.Instead of using the capital for his own business he could rent it to a rival firm and earn
$5,000 a year, In his first year, his revenue was $150,000.
(Scenario: Accounting and Economic Profit) What are the implicit costs of Wang's Wicker Furniture Store?
A.$7,000
B.$60,000
C.$65,000
D.$69,000

Question 41

In economic analysis, the principle of marginal analysis refers to:
A.a method of analysis that divides large problems into smaller, more manageable ones.
B.the notion that problems facing a group of individuals can be effectively analyzed by focusing on only a small subsample of the group.
C.the result that the optimal quantity of an activity is that at which marginal benefit is equal to marginal cost.
D.the result that the optimal quantity of an activity is that at which the net benefit of the representative, or marginal, individual is maximized.

Question 42

(Table: Marginal Cost of Sweatshirts) Look at the table Marginal Cost of Sweatshirts.The marginal cost of the fifth sweatshirt is:
A.$17.
B.$15.
C.$13.
D.$11.

Question 43

Pauli's Pizza offers the following prices: one slice for $2, two slices for $3.50, three slices for
$4.50, four slices for $5.00.The marginal cost of the third slice to Hui is:
A.$4.50.
B.$10.
C.$1.
D.$2.

Question 44

Andreas is a political consultant with his own firm.He travels the country and provides campaign advice for political candidates.Last year he earned $250,000 in revenue for his services.He pays one employee $50,000 to manage the small office back home and pays $25,000 on rent and utilities for that office.Andreas owns computing and office equipment that depreciated by $5,000 last year.His accountant tells him that if he were to sell all of the equipment, he could put that money in the bank and earn $3,000 in interest next year.Bill also has received an offer to teach political science at a college at a salary of $100,000.Bill's accounting profit is equal to and his
economic profit is equal to _.
A.$175,000; $67,000
B.$170,000; $67,000
C.$200,000; $72,000
D.$170,000; $70,000

Question 45

The amount by which an additional unit of an activity increases total cost is:
A.net benefit.marginal
B.benefit.negative
C.benefit.
D.marginal cost.

Question 46

The amount by which an additional unit of an activity increases total benefit is:
A.net benefit.
B.marginal benefit.
C.marginal cost.
D.utility.

Question 47

Feng is thinking of mowing lawns over the summer.His friend Jason mows lawns, and he says the marginal cost of mowing the fourth lawn in a day is $40.Feng thinks about it and realizes that the total cost of mowing four lawns is:
A.$160.
B.$40.
C.$80.
not possible to determine from the information provided.

Question 48

Figure: The Marginal Cost Curve
(Figure: The Marginal Cost Curve) Look at the figure The Marginal Cost Curve.According to the marginal cost curve, the approximate total cost of mowing seven lawns is:
A.$175.
B.$113.
C.$50.
D.$24.

Question 49

For which of the following decisions would marginal analysis be relevant?
A.spending $1,000 on a summer vacation or on painting your house
B.deciding how much to spend on a summer vacation
C.buying a new car or a second-hand car
D.eating dinner at home or going out to a restaurant for dinner

Question 50

Marginal analysis is relevant for:
A.both "either-or" and "how much" decisions.
B.only "either-or" decisions.
C.only "how much" decisions.
D.only those situations where the time value of money is involved.

Question 51

(Table: Marginal Cost of Sweatshirts) Look at the table Marginal Cost of Sweatshirts.The marginal cost of the second sweatshirt is:
A.$9.
B.$20.
C.$11.
D.$29.

Question 52

Figure: The Marginal Cost Curve
(Figure: The Marginal Cost Curve) Look at the figure The Marginal Cost Curve.According to the marginal cost curve, the total cost of mowing four lawns is approximately:
A.$10.
B.$15.
C.$50.
D.$100.

Question 53

In economics, a marginal value refers to:
A.the value associated with an unimportant, or marginal, activity.
B.a value entered as an explanatory item in the margin of a balance sheet or other accounts.
C.the value associated with one more unit of an activity.
D.a value that is most appropriately identified in a footnote.

Question 54

A "how much" decision is best made by comparing:
A.the explicit costs of an action to the implicit costs of that action.
B.the accounting profit of an action to the economic profit of that action.
C.the marginal benefits of an action to the marginal costs of that action.

Question 55

Scenario: Accounting and Economic Profit
Rather than put the $100,000 that his grandmother left him in a mutual fund that earns 5% each year, Tommy Wang quit his job that paid $60,000 per year and started Wang's Wicker Furniture Store.He rented a showroom for $15,000 for the year, purchased capital equipment that depreciates $5,000 each year, purchased $60,000 in wicker furniture, and incurred costs of $40,000 for sales help and advertising.Instead of using the capital for his own business he could rent it to a rival firm and earn
$5,000 a year, In his first year, his revenue was $150,000. (Scenario: Accounting and Economic Profit) The economic profit of Wang's Wicker Furniture Store is:
A.$67,000.
B.$0.
C.-$20,000.
D.-$35,000.

Question 56

The is the amount by which an additional unit of activity increases its cost.
A.marginal cost
B.average cost
C.average profit
D.marginal benefit

Question 57

Figure: The Marginal Cost Curve
(Figure: The Marginal Cost Curve) Look at the figure The Marginal Cost Curve.Using the marginal cost curve in the figure provided, the total cost of mowing five lawns is approximately:
A.$68.
B.$100.
C.$50.
D.$10.

Question 58

(Table: Marginal Cost of Sweatshirts) Look at the table Marginal Cost of Sweatshirts.The marginal cost of the fourth sweatshirt is:
A.$9.
B.$20.
C.$24.
D.$15.

Question 59

The amount by which an additional unit of an activity increases total cost is:
A.net benefit.marginal
B.benefit.negative
C.benefit.
D.marginal cost.

Question 60

(Table: Marginal Cost of Sweatshirts) Look at the table Marginal Cost of Sweatshirts.The marginal cost of the third sweatshirt is:
A.$33.
B.$13.
C.$11.
D.$9.

Question 61

Figure: The Marginal Benefit Curve
(Figure: Marginal Benefit Curve) Look at the figure The Marginal Benefit Curve.According to the marginal benefit curve, the total benefit of mowing six lawns is approximately:
A.$19.
B.$35.
C.$154.
D.$200.

Question 62

(Table: Marginal Benefit of Sweatshirts) Look at the table Marginal Benefit of Sweatshirts.The marginal benefit of producing the fifth sweatshirt is:
A.$70.
B.$14.
C.$13.
D.$12.

Question 63

According to the optimal output rule, if the marginal benefit is:
A.more than the marginal cost, an activity should be increased.
B.less than the marginal cost, an activity should be increased.
C.equal to the marginal cost, an activity should be increased.
D.more than the marginal cost, net benefit is maximized.

Question 64

(Table: Marginal Benefit of Sweatshirts) Look at the table Marginal Benefit of Sweatshirts.The marginal benefit of producing the fourth sweatshirt is:
A.$58.
B.$14.
C.$13.
D.$12.

Question 65

Figure: The Marginal Benefit Curve
(Figure: Marginal Benefit Curve) Look at the figure The Marginal Benefit Curve.According to the marginal benefit curve, the total benefit of mowing seven lawns is approximately:
A.$172.
B.$140.
C.$60.
D.$18.

Question 66

Constant marginal costs occur when each individual unit costs
A.less than the previous one to produce.
B.more than the previous one to produce.
C.the same to produce as the previous one.
D.nothing to produce.

Question 67

(Table: Marginal Benefit of Sweatshirts) Look at the table Marginal Benefit of Sweatshirts.The marginal benefit of producing the second sweatshirt is:
A.$31.
B.$16.
C.$15.
D.$14.

Question 68

(Table: Marginal Benefit of Sweatshirts) Look at the table Marginal Benefit of Sweatshirts.The marginal benefit of producing the third sweatshirt is:
A.$31.
B.$16.
C.$15.
D.$14.

Question 69

Whenever marginal benefit is less than marginal cost, the decision maker should do of
the activity.
A.less
B.that exact amount
C.more
D.none

Question 70

According to the optimal output rule, if the marginal benefit is:
A.more than the marginal cost, an activity should be reduced.
B.less than the marginal cost, an activity should be increased.
C.equal to the marginal cost, net benefit is maximized.
D.more than marginal cost, net benefit is maximized.

Question 71

(Table: Marginal Cost of Sweatshirts) Look at the table Marginal Cost of Sweatshirts.The marginal cost of producing sweatshirts is an example of marginal costs.
A.decreasing
B.increasing
C.constant
D.random

Question 72

The is the amount by which an additional unit of an activity increases its total benefit.
A.average benefit
B.net benefit
C.marginal benefit
D.top benefit

Question 73

Marginal benefit:
A.is the subsidiary benefit from an activity; for example, the main benefit from weight training is an increase in muscle mass, and the subsidiary or marginal benefit might be a reduction in cholesterol.
B.is the addition to total benefit due to undertaking one more unit of an activity.
C.must be increasing if total benefit is increasing.
D.normally increases as more of an activity is undertaken.

Question 74

According to the optimal output rule, if the marginal benefit is:
A.more than the marginal cost, an activity should be reduced.
B.less than the marginal cost, an activity should be reduced.
C.equal to the marginal cost, an activity should be reduced.
D.more than the marginal cost, net benefit is maximized.

Question 75

The amount by which an additional unit of an activity increases total benefit is:
A.net benefit.
B.marginal benefit.
C.marginal cost.
D.utility.

Question 76

Learning effects often result in marginal costs.
A.decreasing
B.increasing
C.constant
D.random

Question 77

Tara notices that studying for one hour after class increases her economics grade by 11 points.The second hour yields a 7-point gain, the third hour yields a 4-point gain, and the fourth hour yields only a 1-point gain.This means that the marginal of studying decreases with study hours.
A.cost
B.benefit
C.opportunity
cost
D.time

Question 78

Wendy sells ice-making machines.She can sell six per week at a price of $2,000.If she charges
$2,100, she will sell only five per week.The marginal benefit of selling the sixth ice-making machine is:
A.$2,000.
B.$2,100.
C.$12,000.
D.$1,500.

Question 79

Figure: The Marginal Benefit Curve
(Figure: Marginal Benefit Curve) Look at the figure The Marginal Benefit Curve.According to the marginal benefit curve, the total benefit of mowing four lawns is approximately:
A.$25
B.$35
C.$80.
D.$114.

Question 80

Whenever marginal benefit is greater than marginal cost, the decision maker should do ________
of the activity.
A.Less
B.that exact amount
C.more
D.none