Deck 7: Production and Cost in the Firm

Question 1

Implicit cost involves a direct cash payment for the use of a resource.

Answer 1

False

Question 2

The difference between a firm's total revenue and what must be paid toattract resources from their best alternative use is called

A)total revenue
B)utility
C)economic profit
D)cost
E)production efficiency

Answer 2

C

Question 3

Opportunity cost usually

A)cannot be measured
B)applies to labor but not to capital
C)is involved in calculating economic profit
D)is greater than the cash payment made to a resource
E)is less than the cash payment made to a resource

Answer 3

C

Question 4

If Ripco owns the building where it operates, then if

A)the firm pays no rent, there is no opportunity cost
B)the firm does not rent the building to anyone else, there is no opportunity cost
C)the firm pays no rent, there is an opportunity cost
D)its usage of the building precludes it from renting to anyone else, there is an opportunity cost
E)the firm could use the building for other things, there is no opportunity cost

Question 5

Which of the following is not an explicit cost?

A)salaries
B)sales taxes
C)the cost of utilities, such as gas and electricity
D)insurance premiums
E)the value of a firm owner's time

Question 6

If a firm's economic profit is positive, its accounting profit must also bepositive.

Question 7

Unlike implicit costs, explicit costs

A)reflect opportunity costs
B)include the value of the owner's time
C)are not included in a firm's accounting statements
D)are actual cash payments
E)do not change as a firm's output changes

Question 8

An implicit cost is

A)any cost a firm cannot avoid in the short run
B)any expenditure a firm makes
C)an opportunity cost
D)accurately measured in accounting statements
E)ignored by economists

Question 9

All other things constant, higher implicit cost results in lower accountingprofit.

Question 10

Amanda, age 6, opens a lemonade stand.She makes all the lemonade froma mix she found in her parents' pantry.Her stand is an old box she found inthe garage.The pitcher and paper cups were taken from the kitchen.Whichof the following is true?

A)The opportunity cost of the lemonade is zero.
B)The only opportunity cost of the lemonade is Amanda's time.
C)Amanda's explicit costs are zero.
D)The implicit costs of Amanda's lemonade are zero.
E)Whatever revenue Amanda gets will be pure economic profit.

Question 11

The reason economists assume that firms try to maximize economic profit is

A)over time, firms that don't earn profits will have difficulty securing financing to survive
B)firms in the real world always maximize profit
C)profit is easier to calculate than revenues
D)if a firm fails to earn a profit in its first year, it will go out of business
E)profit maximization is easier for firms than revenue maximization

Question 12

)Which of the following are implicit costs for a typical firm?

A)insurance costs
B)electricity costs
C)opportunity costs of capital owned and used by the firm
D)cost of labor hired by the firm
E)the cost of raw materials

Question 13

Cash payments for steel to be used in production would be an example of

A)sunk costs
B)fixed costs
C)explicit costs
D)implicit costs
E)entrepreneurial costs

Question 14

A young chef is considering opening his own sushi bar.To do so, he wouldhave to quit his current job, which pays $20,000 a year, and take over astore building that he owns and currently rents to his brother for $6,000 ayear.His expenses at the sushi bar would be $50,000 for food and $2,000for gas and electricity.What are his implicit costs?

A)$26,000
B)$66,000
C)$78,000
D)$52,000
E)$72,000

Question 15

Two friends, Diane and Sam, own and run a bar.Diane tends bar onMonday, Wednesday, and Friday and receives a wage in addition to tips.Sam tends bar on Tuesday, Thursday, and Saturday and receives only tips.Which of the following represents an implicit cost of operating the bar?

A)Diane's wage
B)Sam's time
C)Diane's tips
D)Sam's tips
E)both Diane's and Sam's tips

Question 16

Explicit costs are

A)not part of opportunity cost
B)the only cost considered in opportunity cost
C)exactly the same as implicit costs
D)actual monetary payments for resources purchased
E)the opportunity costs of using resources owned by the firm

Question 17

If all my savings are invested in my consulting company, an increase in theinterest rate increases my implicit costs.

Question 18

John moved his office from a building he was renting downtown to thecarriage house he owns in back of his house.How will his costs change?

A)explicit and implicit costs rise
B)explicit costs rise; implicit costs fall
C)explicit and implicit costs fall
D)explicit costs fall; implicit costs rise
E)not enough information is given

Question 19

A young chef is considering opening his own sushi bar.To do so, he wouldhave to quit his current job, which pays $20,000 a year, and take over astore building that he owns and currently rents to his brother for $6,000 ayear.His expenses at the sushi bar would be $50,000 for food and $2,000for gas and electricity.What are his explicit costs?

A)$26,000
B)$66,000
C)$78,000
D)$52,000
E)$72,000

Question 20

A firm's opportunity costs of using resources provided by the firm's ownersare called

A)sunk costs
B)fixed costs
C)explicit costs
D)implicit costs
E)entrepreneurial costs

Question 21

Sally owns a small business that she operates in a small building she owns.Given the information in Exhibit 7­1, Sally's normal profit is

A)$80,000
B)$41,000
C)$65,000
D)$35,000
E)$24,000

Question 22

Which of the following would be shown on IBM's accounting statement?

A)revenue, implicit costs, explicit costs, and economic profit
B)revenue, implicit costs, explicit costs, and accounting profit
C)revenue, explicit costs, and economic profit
D)revenue, explicit costs, and accounting profit
E)revenue, implicit costs, and accounting profit

Question 23

Economic profit is defined as total revenue

A)plus total costs
B)minus marginal costs
C)minus variable costs
D)minus total costs
E)minus fixed costs

Question 24

Zipco's economic profit is equal to its

A)total revenue minus accounting profit
B)total revenue minus explicit costs
C)total revenue plus accounting profit
D)total revenue plus opportunity costs
E)accounting profit minus implicit costs

Question 25

Suppose a professor gives up her teaching job to devote her time to writingtextbooks.If salaries of professors rise,

A)her accounting profit will rise
B)her accounting profit will fall
C)her explicit costs will rise
D)her economic profit from textbooks will fall
E)her economic profit from textbooks will rise

Question 26

John moved his office from a building he was renting downtown to thecarriage house he owns in back of his house.How will his profit change?

A)Implicit costs fall.
B)Explicit costs remain unchanged while implicit costs rise.
C)Economic profit must fall.
D)Explicit costs rise.
E)Accounting profit will rise.

Question 27

Which of the following would not appear on a firm's accounting statement?

A)sunk costs
B)fixed costs
C)explicit costs
D)implicit costs
E)insurance costs

Question 28

If the Baloney Store earns more than a normal profit, its

A)economic profit must be greater than its accounting profit
B)economic profit is positive
C)economic profit is, therefore, equal to its accounting profit
D)accounting profit is zero
E)accounting profit is less than its economic profit

Question 29

Accounting profit equals

A)explicit costs minus implicit costs
B)economic profit minus implicit costs
C)economic profit minus explicit costs
D)economic profit minus explicit costs and implicit costs
E)economic profit plus implicit costs

Question 30

If General Motors is earning only a normal profit,

A)it is making economic profit
B)it is breaking even
C)it is suffering an economic loss
D)it is covering only explicit costs
E)it is covering only implicit costs

Question 31

Accounting profit is

A)always less than economic profit
B)never less than economic profit
C)equal to economic profit if a normal profit is earned
D)less than economic profit only when implicit costs are greater than explicit costs
E)greater than economic profit only when implicit costs are greater than explicit costs

Question 32

Zipco's accounting profit is equal to its

A)total revenue minus opportunity costs
B)total revenue plus opportunity costs
C)total revenue minus imputed costs
D)total revenue minus explicit costs
E)total revenue minus explicit and implicit costs

Question 33

Suppose a soccer coach has been making $25,000 per year but gives up hiscoaching job in order to make lace doilies.If his revenue from the sale ofthese doilies is $50,000 and his materials cost $20,000, then his economicprofit is

A)$5,000
B)$25,000
C)$30,000
D)$50,000
E)$80,000

Question 34

Suppose Bob leaves his $50,000­a­year job as a financial advisor toP.E.T.S.and starts his own business selling spot remover for Dalmatians.Inthe first year his accounting profit is $70,000.Based on this level ofsuccess, Bob should

A)return to his old job because his economic profit is negative
B)return to his old job because his economic profit is smaller than his accounting profit
C)return to his old job because his economic profit is less than his old salary
D)stay with his new firm because his economic profit is positive
E)stay with his new firm because accounting profit is positive

Question 35

Economic profit is defined as

A)total revenue minus price
B)price minus quantity
C)total revenue minus what must be paid to resources to attract them from their best alternative use
D)total revenue divided by what must be paid to resources to attract them from their best alternative
Use
E)total revenue plus what must be paid to resources to attract them from their best alternative use

Question 36

Suppose Ernie gives up his job as financial advisor for P.E.T.S., at which heearned $30,000 per year, to open up a store selling spot remover toDalmatians.He invested $10,000 in the store, which had been in savingsearning 5 percent interest.This year's revenues in the new business were$50,000, and explicit costs were $10,000.Calculate Ernie's accountingprofit.

A)$10,000
B)$50,000
C)$20,000
D)$40,000
E)$9,500

Question 37

Maryann and Don want to open their own deli.To do so, Maryann mustgive up her job, at which she earns $20,000 per year, and Don must give uphis part­time job, at which he earns $10,000 per year.They must liquidatetheir money market fund, which earns $1,000 interest annually.The rent onthe building is $10,000 per year, and expenses for such necessities asutilities, corned beef, and pickles are $35,000 annually.What minimumamount of revenue per year would make it worthwhile, financially, forMaryann and Don to operate the deli?

A)$10,000
B)$35,000
C)$45,000
D)$31,000
E)$76,000

Question 38

Sally owns a small business that she operates in a small building she owns.Given the information in Exhibit 7­1, Sally's accounting profit is

A)$80,000
B)$50,000
C)$65,000
D)$35,000
E)$24,000

Question 39

Normal profit is defined as

A)accounting profit
B)economic profit
C)profit necessary to ensure that opportunity costs are covered
D)accounting profit minus economic profit
E)economic profit minus accounting profit

Question 40

If the Money Store earns a normal profit this year, its

A)economic profit is equal to its accounting profit
B)economic profit is zero
C)economic profit is equal to the average accounting profit in other industries
D)accounting profit is zero
E)accounting profit is less than its economic profit

Question 41

In the long run, all inputs are variable.

Question 42

A young chef is considering opening his own sushi bar.To do so, he wouldhave to quit his current job, which pays $20,000 a year, and take over astore building he owns and currently rents for $6,000 a year.His expensesat the sushi bar would be $50,000 for food and $2,000 for gas andelectricity.What is the minimum revenue he must earn per year in order forit to be worth his while to open his sushi bar?

A)$26,000
B)$66,000
C)$78,000
D)$52,000
E)$72,000

Question 43

If marginal product is negative, total product must be negative.

Question 44

Bart operates a lemonade stand in front of his house.His father works atthe Springfield Nuclear Power Plant.Which of the following is most likelyto be true?

A)The long run is the same for the power plant as it is for the lemonade stand.
B)The long run is longer for the power plant than it is for the lemonade stand.
C)The long run is shorter for the power plant than it is for the lemonade stand.
D)We cannot compare the long runs because these are different businesses.
E)It's impossible for the power plant short run to be shorter than the lemonade stand's long run.

Question 45

The long run is a period of time

A)during which at least one resource is fixed
B)during which all resources are variable
C)during which all resources are fixed
D)less than one year
E)greater than one year

Question 46

The length of time that represents the long run

A)is greater than one year
B)is greater than six months
C)is longer in service industries than in manufacturing
D)is the same for all industries
E)varies from industry to industry

Question 47

Which of the following is a long­run adjustment?

A)A new economics professor is hired on campus.
B)General Motors increases its orders for steel.
C)Microsoft cuts back its hiring of new graduates.
D)Glow Electric disassembles one of its nuclear power plants.
E)Texaco buys more crude oil to refine into gasoline.

Question 48

Suppose that at the current level of output, Pat's Hats has fixed costs of$500, variable costs of $1,000, and $2,000 in total revenue.Which of thefollowing is true?

A)Profit is currently $500 and, in the long run, it will be $1,000 because there will be no fixed costs.
B)Profit is currently $500 and, in the long run, it will be $1,500 because there will be no variable costs.
C)Profit is currently $500.
D)Profit is currently $500, and Pat's Hats will want to decrease its plant size in the long run to lower its fixed
Costs.
E)Pat's Hats will continue to operate as long as revenue is greater than $500.

Question 49

Which of the following is most likely to be a fixed resource for Paul'sCountry Fresh Pies, Inc.?

A)berries
B)flour
C)bakers
D)eggs
E)ovens

Question 50

Which of the following would most likely reach the long run most rapidly?

A)a nuclear power plant
B)a college
C)a lumber mill
D)a shopping mall
E)a hot dog stand

Question 51

The graph of average fixed cost is a horizontal line.

Question 52

Sally owns a small business that she operates in a small building she owns.Given the information in Exhibit 7­1, Sally's economic profit is

A)$80,000
B)$50,000
C)$65,000
D)$35,000
E)$24,000

Question 53

In the long run, all of a firm's inputs are variable.

Question 54

Suppose I have $1,000 to put into a one­year CD.Community Bank offers 5percent interest, Floatbank offers 5.25 percent, and Squidbank offers 5.40percent.If I place my money in Squidbank, my economic profit on theinvestment is

A)5.40 percent
B)5 percent
C)0.40 percent
D)0.15 percent
E)­0.40 percent

Question 55

The short run is a period of time

A)less than one year
B)greater than one year
C)during which all resources are variable
D)during which at least one resource is fixed
E)during which at least one resource is variable

Question 56

In the short run, all costs are fixed.

Question 57

If a firm is experiencing diminishing marginal returns, its marginal productis negative.

Question 58

Inputs that can be increased or decreased in the short run are called

A)fixed inputs
B)variable inputs
C)economic inputs
D)accounting inputs
E)normal inputs

Question 59

The additional output obtained by adding another unit of labor to theproduction process is called

A)the marginal cost of labor
B)the average output of labor
C)a variable cost
D)the marginal product of labor
E)the marginal utility of labor

Question 60

If a firm is experiencing diminishing marginal returns, its marginal productis declining.

Question 61

In Exhibit 7­3, the marginal product of the third worker is

A)20
B)100/3
C)60
D)50
E)140

Question 62

Given the information in Exhibit 7­2, at what point do diminishing marginalreturns set in?

A)before the first unit of labor
B)between the first and second units of labor
C)between the second and third units of labor
D)between the third and fourth units of labor
E)between the fourth and fifth units of labor

Question 63

The law of diminishing marginal returns states that

A)long­run average cost declines as output increases
B)if the marginal product is above the average product, the average will rise
C)as units of a variable input are added to a given amount of fixed inputs, the marginal product of the
Variable input eventually diminishes
D)as a person consumes more of a good, the marginal satisfaction from that good eventually diminishes
E)if marginal product is positive, total product rises

Question 64

In Exhibit 7­3, diminishing marginal returns set in with the addition of the

A)first worker
B)third worker
C)fourth worker
D)fifth worker
E)seventh worker

Question 65

In Exhibit 7­4, marginal returns begin to diminish with the hiring of the__________ worker.

A)second
B)third
C)fourth
D)fifth
E)sixth

Question 66

) In Exhibit 7­4, marginal returns increase with the hiring of up to __________worker(s).

A)one
B)two
C)three
D)four
E)five

Question 67

Given the information in Exhibit 7­2, what is the average product of thefourth unit of labor?

A)5 pairs of shoes
B)10 pairs of shoes
C)20 pairs of shoes
D)50 pairs of shoes
E)80 pairs of shoes

Question 68

If a firm is experiencing diminishing marginal returns to labor, which of thefollowing must be true?

A)The first workers the firm hired were better than the workers hired later on.
B)The firm is experiencing decreasing returns to scale.
C)The positive effect of specialization in production is being offset by the negative effect of crowding of
Inputs.
D)Output is decreasing.
E)The firm should buy more nonlabor inputs.

Question 69

As Product Co.adds the first four workers to its production process in theshort run, its output rises from 0 to 12 to 25 to 35 to 43.Addition of the fifthworker will most likely lead to an output rate

A)greater than 51
B)equal to 51
C)less than 51
D)greater than 51 if the firm experiences diseconomies of scale
E)none of the above

Question 70

When marginal product is negative, the slope of the total product curve mustbe negative.

Question 71

If total product for each of five units of labor is 10, 16, 20, 30, and 34,respectively, the marginal product of the third unit is

A)20
B)10
C)4
D)0
E)6

Question 72

Given the information in Exhibit 7­2, what is the average product of thethird unit of labor?

A)45 pairs of shoes
B)25 pairs of shoes
C)15 pairs of shoes
D)$45
E)$25

Question 73

Given the information in Exhibit 7­2, at what point do negative marginalreturns set in?

A)before the first unit of labor
B)between the first and second units of labor
C)between the second and third units of labor
D)between the third and fourth units of labor
E)between the fourth and fifth units of labor

Question 74

Given the information in Exhibit 7­2, what is the marginal product of thefourth unit of labor?

A)5 pairs of shoes
B)10 pairs of shoes
C)20 pairs of shoes
D)50 pairs of shoes
E)80 pairs of shoes

Question 75

Given the information in Exhibit 7­2, what is the marginal product of thethird unit of labor?

A)45 pairs of shoes
B)25 pairs of shoes
C)15 pairs of shoes
D)$45
E)$25

Question 76

The law of diminishing marginal returns is first evident in the followingtable

A)when the first worker begins
B)with each of the workers
C)when the third unit of labor is added
D)with the last unit of labor input
E)when the fourth unit of labor is added

Question 77

Marginal product is defined as

A)the increase in revenue that occurs when an additional unit of a resource is added
B)the increase in output that occurs when all resources are increased by the same proportion
C)the increase in output that occurs when an additional unit of a resource is added, holding all other
Resources constant
D)the amount of additional resources needed to increase output by one unit when all resources are
Increased by the same amount
E)the amount of additional money needed to increase output by one unit when all resources are held constant

Question 78

Increasing marginal returns are generally the result of

A)diseconomies of scale
B)increasing costs
C)specialization and division of labor
D)labor unions
E)technology