Deck 12: The Costs of Production

Question 1

Total cost includes:

A)one-time expenses and ongoing expenses.
B)forgone opportunity costs.
C)the amount the firm spends on all inputs that go into the production of a good or service.
D)All of these are included in total cost.

Answer 1

All of these are included in total cost.

Question 2

Suppose Sam's Shoe Co. makes only one kind of shoe, which sells for $50 a pair. If Sam's sells 500,000 pairs of shoes, and has a total cost of $1,000,000, what would the company's profit be?

A)$1,500,000
B)$24,000,000
C)$40,000,000
D)Not enough information is given to calculate profit.

Answer 2

$24,000,000

Question 3

How is total revenue calculated?

A)Cost multiplied by the quantity of each item produced
B)Price multiplied by the quantity of each item sold, subtracted from total cost
C)Price multiplied by the quantity of each item sold
D)None of these calculations are correct.

Answer 3

Price multiplied by the quantity of each item sold

Question 4

An example of an ongoing expense for a toy company would be buying:

A)a delivery truck.
B)a new factory.
C)advertising.
D)None of these are ongoing expenses.

Question 5

A college student is thinking about running an ice cream truck over the summer. What would economists say is the student's main objective?

A)To spend as little on inputs as possible
B)To maximize hourly earnings
C)To sell as many ice cream cones as possible
D)To maximize his profit

Question 6

A college student is thinking about running an ice cream truck over the summer. Which of the following would likely be an ongoing expense of the business?

A)The cost of the truck
B)The cost of the gasoline used
C)The cost of ice cream scoopers
D)None of these are ongoing expenses.

Question 7

How is profit calculated?

A)Total revenue minus total cost
B)Total revenue plus total cost
C)Total cost minus total revenue
D)None of these calculations are correct.

Question 8

Total cost includes:

A)one-time expenses and ongoing expenses.
B)one-time expenses, but not ongoing expenses.
C)ongoing expenses, but not one-time expenses.
D)only expenses that are variable.

Question 9

Total revenue can be defined as:

A)the amount that a firm receives from the sale of goods and services.
B)the amount that a firm spends on all inputs that go into making a good or service.
C)the total amount a firm spends on all inputs used in production.
D)the total number of sales of a good or service by a firm.

Question 10

Total cost can be defined as:

A)the amount that a firm receives from the sale of goods and services.
B)the amount that an individual spends on all normal goods and services within a specified period of time.
C)the amount that a firm spends on all inputs that go into producing a good or service.
D)the total number of purchases of a good or service by an individual.

Question 11

A college student is thinking about running an ice cream truck over the summer. Which of the following would likely be a one-time expense of the business?

A)The cost of ice cream cones
B)The cost of the truck
C)The cost of the gasoline
D)All of these are one-time expenses.

Question 12

Which of the following would be considered a one-time expense?

A)Raw materials
B)An oven
C)Radio ads
D)A manager's salary

Question 13

The amount that a firm receives from the sale of goods and services is called:

A)total cost.
B)total revenue.
C)profit.
D)maximum profit.

Question 14

Economists assume the central goal of any business is to:

A)maximize revenues.
B)minimize costs.
C)maximize profit.
D)maximize market share.

Question 15

Suppose Chip's Chips produces bags of potato chips that sell for $3 a bag. If Chip's sells 12,000 bags and incurs total costs of $30,000, what is the company's profit?

A)$6,000
B)$42,000
C)$36,000
D)$18,000

Question 16

Total revenue is:

A)the amount that a firm spends on all inputs that go into producing a good or service.
B)the quantity sold multiplied by the price paid for each unit.
C)the quantity produced multiplied by the cost of producing each unit.
D)the amount that an individual gets paid over a specified period of time, typically annually.

Question 17

A college student is thinking about running an ice cream truck over the summer. Which of the following would likely be included in the total cost of the business?

A)The cost of ice cream cones
B)The cost of the truck
C)The opportunity cost of the student's time
D)All of these would be included in total cost.

Question 18

_____ would be considered a one-time expense for a shoe factory and would be _____ total cost.

A)A sewing machine; included in
B)A sewing machine; excluded from
C)Leather to make shoes; included in
D)Leather to make shoes; excluded from

Question 19

Suppose Sam's Shoe Co. makes only one kind of shoe, which sells for $50 a pair. If Sam's sells 500,000 pairs of shoes, what would the company's total revenue be?

A)$25,000,000
B)$10,000
C)$2,500,000
D)Not enough information is given to calculate total revenue.

Question 20

Which of the following would be considered an ongoing expense?

A)Employee salaries
B)Raw materials
C)Advertising
D)All of these are ongoing expenses.

Question 21

Suppose Bev's Bags makes large and small handbags. Bev rents an industrial space where she keeps the company's fabric, industrial sewing machine, measuring board, cutting shears, extra needles, thread, buttons, and labels. Bev can produce three bags an hour, regardless of the size of the bag. Which of the following would be considered a fixed cost?

A)The rent Bev pays
B)The fabric
C)The sewing thread
D)None of these are fixed costs.

Question 22

If a firm produces nothing, its _____ equal zero.

A)variable costs
B)fixed costs
C)total costs
D)All of these are correct.

Question 23

Suppose Bev's Bags makes large handbags and small handbags. Bev's sells 70,000 large bags for $45 each and 25,000 small bags for $15 each. If the company has total costs of $2,000,000, what is its profit?

A)$1,525,000
B)$3,525,000
C)$375,000
D)$850,000

Question 24

Suppose Sam's Shoe Co. makes one kind of shoe. An example of a variable cost for this company would be:

A)the design pattern for the shoes.
B)the leather needed to make the shoes.
C)the lease to the factory building.
D)All of these are examples of variable costs.

Question 25

Suppose Chip's Chips produces bags of potato chips. What is needed to calculate the company's total revenue?

A)The cost per bag
B)The quantity of bags sold
C)The cost per bag and the quantity of bags sold
D)The company's market share

Question 26

Suppose Chip's Chips produces bags of potato chips. An example of a fixed cost for this company would be:

A)a potato peeling machine.
B)the factory building.
C)the deep fryer.
D)All of these are examples of fixed costs.

Question 27

Suppose Larry's Lariats produces 25,000 lassos and sells each for $10. What is the company's total revenue?

A)$250,000
B)$25,000
C)$2,500
D)$2,500,000

Question 28

Suppose Bev's Bags makes large and small handbags. Bev rents an industrial space where she keeps the company's fabric, industrial sewing machine, measuring board, cutting shears, extra needles, thread, buttons, and labels. Bev can produce three bags an hour, regardless of the size of the bag. If Bev were to produce no bags, which of the following would be considered a variable cost?

A)The cost of the fabric
B)The sewing machine
C)The measuring board
D)None of these are variable costs if no bags are produced.

Question 29

Suppose Bev's Bags makes large handbags and small handbags. If Bev's sells 70,000 large bags for $45 each and 25,000 small bags for $15 each, what is the company's total revenue?

A)$3,150,000
B)$375,000
C)$3,525,000
D)$2,850,000

Question 30

Suppose Larry's Lariats produces lassos in a factory, using nine feet of rope to make each lasso. The rope is put into a machine that automatically cuts it to the right length and seals the ends to prevent fraying. The rope is then hand tied, dipped, and wound before being placed in a packaging machine to prepare it for retail sale. Which of the following expenses would be considered a fixed cost for this company?

A)Employee wages
B)The cost of rope
C)The packaging material
D)None of these expenses are fixed costs.

Question 31

If a firm increases production, its:

A)variable costs rise.
B)fixed costs stay the same.
C)total costs increase.
D)All of these are correct.

Question 32

Suppose Chip's Chips produces bags of potato chips. An example of a variable cost for this firm would be:

A)the potato peeling machine.
B)the factory building.
C)the deep fryer.
D)None of these are examples of variable costs.

Question 33

Suppose Sam's Shoe Co. makes one kind of shoe. An example of a fixed cost for this company would be:

A)the lease for the factory building.
B)the leather needed to make the shoes.
C)sewing machine needles that need to be replaced every 1,000 pairs.
D)All of these are examples of fixed costs.

Question 34

Suppose Larry's Lariats produces lassos in a factory, using nine feet of rope to make each lasso. The rope is put into a machine that automatically cuts it to the right length and seals the ends to prevent fraying. The rope is then hand tied, dipped, and wound before being placed in a packaging machine to prepare it for retail sale. Which of the following expenses would be considered a variable cost for this company?

A)The cost of the factory
B)Employee wages
C)The rope-cutting machine
D)All of these expenses are variable costs.

Question 35

Suppose Larry's Lariats produces 25,000 lassos and sells each for $10. What is the company's profit?

A)$250,000
B)$25,000
C)$125,000
D)Not enough information is given to calculate profit.

Question 36

Suppose Larry's Lariats produces lassos in a factory, using nine feet of rope to make each lasso. The rope is put into a machine that automatically cuts it to the right length and seals the ends to prevent fraying. The rope is then hand tied, dipped, and wound before being placed in a packaging machine to prepare it for retail sale. Which of the following expenses would be included in the company's total costs?

A)The cost of the rope
B)Employee wages
C)The rope-cutting machine
D)All of these expenses would be included in total cost.

Question 37

Variable costs are:

A)costs that don't depend on the quantity of output produced.
B)costs that depend on the quantity of output produced.
C)one-time costs.
D)usually sunk and thus irrelevant.

Question 38

If a firm stops production, its:

A)fixed costs rise.
B)total costs may increase or decrease.
C)variable costs drop to zero.
D)All are correct.

Question 39

Suppose Bev's Bags makes large and small handbags. Bev rents an industrial space where she keeps the company's fabric, industrial sewing machine, measuring board, cutting shears, extra needles, thread, buttons, and labels. Bev can produce three bags an hour, regardless of the size of the bag. Which of the following would be considered a variable cost?

A)The rent Bev pays
B)The fabric
C)The cutting shears
D)None of these are variable costs.

Question 40

Fixed costs are:

A)costs that depend on the quantity of output produced.
B)input costs that stay the same price per unit.
C)costs that don't depend on the quantity of output produced.
D)costs that are negotiated to stay the same throughout the life of a contract.

Question 41

Mika withdraws $100,000 from her trust fund to open up her own manicure business. The trust fund earns 4 percent interest. In order to properly account for all costs of her business, Mika must not forget:

A)the implicit cost of $104,000.
B)the implicit cost of $4,000.
C)the explicit cost of $104,000.
D)the explicit cost of $4,000.

Question 42

If a sandwich shop produces zero sandwiches, which of the following costs will it still incur?

A)Employee wages
B)Sandwich ingredients
C)The rented storefront
D)None of these costs will be incurred if the shop no longer makes sandwiches.

Question 43

Suppose Larry's Lariats produces lassos in a factory, using nine feet of rope to make each lasso. The rope is put into a machine that automatically cuts it to the right length and seals the ends to prevent fraying. The rope is then hand tied, dipped, and wound before being placed in a packaging machine to prepare it for retail sale. If the company decreases its production of lassos, what is true regarding the company's costs?

A)The variable cost of the rope would drop to zero.
B)The fixed cost of the rope cutting machine would stay the same.
C)The fixed cost of employee wages would stay the same.
D)None of these are correct.

Question 44

If a firm stops production, then its:

A)variable costs decrease to zero.
B)fixed costs stay the same.
C)total costs decrease.
D)All of these are correct.

Question 45

Junpei needs $25,000 to start up his own business and get it off the ground. He can either withdraw the money from his savings account, where he currently earns 3 percent, or he can take out a loan for $25,000 and pay 5 percent interest. Junpei should compare _____ and choose to _____.

A)the implicit cost of $750 to the explicit cost of $1,250; use his savings
B)the implicit cost of $750 to the explicit cost of $1,250; borrow the money
C)the explicit cost of $750 to the implicit cost of $1,250; use his savings
D)the explicit cost of $25,750 to the explicit cost of $26,250; borrow the money

Question 46

Jermaine wants to open his own repair shop, and is considering using his savings of $30,000 to get it started. He is currently earning 3 percent interest on his savings. However, Jermaine's friend Bob wishes to borrow the $30,000 to start up a bagel shop, offering to pay Jermaine 5 percent interest if he loans out the money. If Jermaine were to use the money to open his repair shop, rather than loan it to Bob, how can he accurately account for his costs?

A)Jermaine must consider the $900 in forgone interest on his savings as an implicit cost.
B)Jermaine must consider the $1,500 in forgone interest from loaning the money to Bob as an implicit cost.
C)Jermaine must consider the $900 in forgone interest on his savings as an explicit cost.
D)Jermaine must consider the $1,500 in forgone interest from loaning the money to Bob as an explicit cost.

Question 47

Priya needs $50,000 to start up her own business and get it off the ground. She can either withdraw the money from her savings account, where she currently earns 2 percent, or she can take out a loan for $50,000 and pay 2 percent interest. Priya should compare _____ and choose to _____.

A)the implicit cost of $1,000 to the explicit cost of $51,000; use her savings
B)the implicit cost of $51,000 to the explicit cost of $1,000; borrow the money
C)the explicit cost of $1,000 to the implicit cost of $1,000; either use her savings or borrow the money, as each option costs the same
D)the explicit cost of $1,000 to the implicit cost of $51,000; borrow the money

Question 48

If a firm decreases production, its:

A)variable costs decrease.
B)fixed costs decrease.
C)total costs stay the same.
D)None of these are correct.

Question 49

Suppose Bev's Bags makes large and small handbags. Bev rents an industrial space where she keeps the company's fabric, industrial sewing machine, measuring board, cutting shears, extra needles, thread, buttons, and labels. Bev can produce three bags an hour, regardless of the size of the bag. If Bev produces no bags, which of the following is true regarding Bev's costs?

A)The variable cost of fabric would drop to zero.
B)The fixed cost of thread would stay the same.
C)The variable cost of cutting shears would drop to zero.
D)All of these are correct.

Question 50

Mika's Manicures leases a space in the local mall for $4,500 a month. For her business, this expense would be considered a(n):

A)implicit cost of $4,500.
B)explicit cost of $4,500.
C)explicit cost of $0.
D)fixed cost of $4,500.

Question 51

Tina withdraws $20,000 from her money market account to start up her own house cleaning business. Over that time, the account would have earned 3 percent interest. In order to properly account for all costs of her business, Tina must not forget:

A)the opportunity cost of $2,600.
B)the opportunity cost of $600.
C)the fixed cost of $20,600.
D)the fixed cost of $20,600 and the opportunity cost of $600.

Question 52

Davy's Doggie Daycare rents a warehouse and field for $2,000 a month to house its boarded pooches. Farmer Fred owns the property; he used to use it for farming and made $3,000 a month, but has since retired. What is the cost of the warehouse and field to Davy?

A)It is an explicit cost of $2,000.
B)It is an implicit cost of $3,000.
C)It is an implicit cost of $0.
D)There is both an explicit and implicit cost totalling $5,000.

Question 53

Costs that require a firm to spend money are:

A)fixed costs.
B)variable costs.
C)explicit costs.
D)implicit costs.

Question 54

Explicit costs are costs that:

A)require a firm to spend money.
B)are zero when no output is produced.
C)do not depend on the quantity of output produced.
D)depend on the quantity of output produced.

Question 55

If a firm decreases production, its:

A)variable costs rise.
B)fixed costs stay the same.
C)total costs increase.
D)All of these are correct.

Question 56

Mariana needs $20,000 to start up her own business and get it off the ground. She can either withdraw the money from her savings account, where she currently earns 1.5 percent interest, or she can take out a loan for $20,000 and pay 4 percent interest. Which of the following statements is true?The implicit cost of taking out a loan is $300.The explicit cost of taking out a loan is $800.The implicit cost of withdrawing money from her savings account is $300.

A)I only
B)II only
C)II and III only
D)I, II and III

Question 57

Mika borrows $100,000 to open up her own beauty shop. She pays 5 percent interest on her loan. In order to account for all costs of her business, Mika must not forget:

A)the implicit cost of $100,000.
B)the implicit cost of $5,000.
C)the explicit cost of $105,000.
D)the explicit cost of $5,000.

Question 58

Implicit costs are costs that:

A)require a firm to spend money.
B)represent forgone opportunities.
C)do not depend on the quantity of output produced.
D)depend on the quantity of output produced.

Question 59

Explicit costs can include:

A)out-of-pocket costs.
B)fixed costs.
C)variable costs.
D)All of these can be included in explicit costs.

Question 60

Mika withdraws $100,000 from her trust fund to start up her own manicure business. The trust fund earns 4 percent interest. Which of the following statements is true about her business costs?The $4,000 of interest foregone is an implicit cost.When calculating her accounting profit, she should consider the $4,000 in foregone interest as part of her costs.When calculating her economic profit, she should consider the $100,000 from her trust fund and the $4,000 in foregone interest as part of her implicit costs.

A)I only
B)I and III only
C)II and III only
D)I and II only

Question 61

Suppose Winston's annual salary as an accountant is $60,000 and his financial assets generate $4,000 per year in interest. One day, after deciding to be his own boss, he quits his job and uses his financial assets to establish a consulting business, which he runs out of his home. He outlays $8,000 in cash to cover all the costs involved with running the business and earns revenues of $150,000. What is Winston's implicit cost?

A)$64,000
B)$72,000
C)$4,000
D)$60,000

Question 62

Imagine Tom's annual salary as an assistant store manager is $30,000. He also owns a building that he rents out, earning $10,000 annually, and he has financial assets that generate $1,000 per year in interest. One day, after deciding to be his own boss, he quits his job, evicts his tenants, and uses his financial assets to establish a bicycle repair shop in the building he owns. To run the business, he outlays $15,000 in cash to cover all the costs involved with running the business, and earns revenues of $50,000. What is Tom's accounting profit?

A)$50,000
B)$24,000
C)$35,000
D)−$6,000

Question 63

When a company's economic profit is positive, what will the accounting profit most likely be?

A)Positive
B)Negative
C)Zero
D)All of these are equally likely.

Question 64

Accounting profit is calculated as:

A)total revenue minus explicit costs.
B)total revenue minus all opportunity costs (explicit and implicit).
C)total revenue minus implicit costs.
D)None of these calculations are correct.

Question 65

In general, economic profit is typically:

A)greater than accounting profit.
B)less than accounting profit.
C)the same as accounting profit.
D)not comparable to accounting profit.

Question 66

Imagine Tom's annual salary as an assistant store manager is $30,000. He also owns a building that he rents out, earning $10,000 annually, and he has financial assets that generate $1,000 per year in interest. One day, after deciding to be his own boss, he quits his job, evicts his tenants, and uses his financial assets to establish a bicycle repair shop in the building he owns. To run the business, he outlays $15,000 in cash to cover all the costs involved with running the business and earns revenues of $50,000. What is Tom's economic profit?

A)$35,000
B)$50,000
C)$24,000
D)−$6,000

Question 67

Imagine Tom's annual salary as an assistant store manager is $30,000. He also owns a building that he rents out, earning $10,000 annually, and he has financial assets that generate $1,000 per year in interest. One day, after deciding to be his own boss, he quits his job, evicts his tenants, and uses his financial assets to establish a bicycle repair shop in the building he owns. To run the business, he outlays $15,000 in cash to cover all the costs involved with running the business and earns revenues of $50,000. Has Tom made the best decision?

A)Yes, because his accounting profit is positive.
B)No, because his economic profit is negative.
C)Yes, because his accounting profit is larger than his economic profit.
D)No, because his accounting profit is larger than his economic profit.

Question 68

When a company's economic profit is negative, what will the accounting profit be?

A)Positive
B)Negative
C)Zero
D)It could be positive, negative, or zero.

Question 69

Suppose Winston's annual salary as an accountant is $60,000 and his financial assets generate $4,000 per year in interest. One day, after deciding to be his own boss, he quits his job and uses his financial assets to establish a consulting business, which he runs out of his home. He outlays $8,000 in cash to cover all the costs involved with running the business and earns revenues of $150,000. What is Winston's accounting profit?

A)$78,000
B)$142,000
C)$138,000
D)$150,000

Question 70

When a company's accounting profit is negative, what will the economic profit be?

A)Positive
B)Negative
C)Zero
D)It could be positive, negative, or zero.

Question 71

Imagine Tom's annual salary as an assistant store manager is $30,000. He also owns a building that he rents out, earning $10,000 annually, and he has financial assets that generate $1,000 per year in interest. One day, after deciding to be his own boss, he quits his job, evicts his tenants, and uses his financial assets to establish a bicycle repair shop in the building he owns. To run the business, he outlays $15,000 in cash to cover all the costs involved with running the business and earns revenues of $50,000. What decision should Tom make next?

A)He should close the shop and return to his old job and use of assets, because he is earning $6,000 less now.
B)He should keep the shop going, because he's earning $35,000 a year, which is a healthy amount for the business.
C)He should keep the shop going, because he's earning $5,000 more than the salary he was earning in the past.
D)He should close the shop, because the accounting profit is negative.

Question 72

Suppose Winston's annual salary as an accountant is $60,000 and his financial assets generate $4,000 per year in interest. One day, after deciding to be his own boss, he quits his job and uses his financial assets to establish a consulting business, which he runs out of his home. He outlays $8,000 in cash to cover all the costs involved with running the business and earns revenues of $150,000. What is Winston's economic profit?

A)$78,000
B)$142,000
C)$138,000
D)$150,000

Question 73

Imagine Tom's annual salary as an assistant store manager is $30,000. He also owns a building that he rents out, earning $10,000 annually, and he has financial assets that generate $1,000 per year in interest. One day, after deciding to be his own boss, he quits his job, evicts his tenants, and uses his financial assets to establish a bicycle repair shop in the building he owns. To run the business, he outlays $15,000 in cash to cover all the costs involved with running the business and earns revenues of $50,000. Which of the following statements is true?

A)Tom has an opportunity cost of $41,000.
B)Tom earns an accounting profit of $35,000.
C)Tom experiences an economic loss of $6,000.
D)All of these are correct.

Question 74

When a company's economic profit is zero, what will the accounting profit most likely be?

A)Positive
B)Negative
C)Zero
D)All of these are equally likely.

Question 75

Suppose Winston's annual salary as an accountant is $60,000 and his financial assets generate $4,000 per year in interest. One day, after deciding to be his own boss, he quits his job and uses his financial assets to establish a consulting business, which he runs out of his home. He outlays $8,000 in cash to cover all the costs involved with running the business and earns revenues of $150,000. What costs would be considered when calculating economic profit?

A)The opportunity cost of his job and interest forgone of $64,000 and the explicit cost of $8,000
B)The implicit cost of the interest forgone of $4,000 and the explicit cost of $8,000
C)The explicit cost of $8,000
D)The implicit cost of his job of $60,000 and the opportunity cost of forgone interest of $4,000

Question 76

The larger the implicit cost of a business:

A)the greater accounting profit will be.
B)the smaller economic profit will be.
C)the more successful the venture will be.
D)the smaller the explicit cost will be.

Question 77

When a company's accounting profit is positive, what will the economic profit be?

A)Positive
B)Negative
C)Zero
D)It could be positive, negative, or zero.

Question 78

Suppose Winston's annual salary as an accountant is $60,000 and his financial assets generate $4,000 per year in interest. One day, after deciding to be his own boss, he quits his job and uses his financial assets to establish a consulting business, which he runs out of his home. He outlays $8,000 in cash to cover all the costs involved with running the business and earns revenues of $150,000. What is Winston's explicit cost?

A)$64,000
B)$72,000
C)$8,000
D)$12,000

Question 79

Suppose Winston's annual salary as an accountant is $60,000 and his financial assets generate $4,000 per year in interest. One day, after deciding to be his own boss, he quits his job and uses his financial assets to establish a consulting business, which he runs out of his home. He outlays $8,000 in cash to cover all the costs involved with running the business and earns revenues of $150,000. What costs would be considered when calculating accounting profit?

A)The opportunity cost of his job and interest forgone of $64,000 and the explicit cost of $8,000
B)The implicit cost of the interest forgone of $4,000 and the explicit cost of $8,000
C)The explicit cost of $8,000
D)The implicit cost of his job of $60,000 and the opportunity cost of forgone interest of $4,000

Question 80

When a company's accounting profit is zero, what will the economic profit most likely be?

A)Zero
B)Positive
C)Negative
D)All of these are equally likely.