Deck 9: Businesses and the Costs of Production

Question 1

At zero units of output, a firm's variable costs are zero.

Answer 1

True

Question 2

When the total product is at its maximum level, the marginal product is zero.

Answer 2

True

Question 3

If a firm produces zero output in the short run, then its profits will also be zero.

Answer 3

False

Question 4

In the long run, a firm can increase its output quantity, but it will be limited by the size of its existing production plant.

Question 5

Economic profit is found by subtracting accounting costs from total revenue.

Question 6

If the average product of labor equals 4 at all levels of output, the marginal product of labor is also equal to 4 at all levels of output.

Question 7

Over the range of positive, but diminishing, marginal returns for an input, the total product curve increases at a decreasing rate.

Question 8

Minimum efficient scale varies by industry.

Question 9

Economic profits are usually larger than accounting profits.

Question 10

The short run is a period of time during which all costs are fixed costs.

Question 11

The real opportunity cost of producing product X is the amounts of products Y, Z, and so forth, that might have been produced if resources had not been used to produce X.

Question 12

A firm's economic profit is usually higher than its accounting profit.

Question 13

Diseconomies of scale stem primarily from the difficulties in managing and coordinating a large-scale business enterprise.

Question 14

The law of diminishing returns explains why short-run marginal cost curves are upsloping.

Question 15

Variable costs are costs that change directly with output.

Question 16

Normal profit is an implicit cost.

Question 17

The law of diminishing returns explains diseconomies of scale.

Question 18

Average fixed costs diminish continuously as output increases.

Question 19

When total product is increasing at a decreasing rate, marginal product is positive, but falling.

Question 20

When diminishing marginal returns starts occurring, the addition of successive units of a variable resource to a fixed resource will cause the firm's production to diminish.

Question 21

The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $55,000Annual lease on building = $23,000Annual revenue from operations = $320,000Payments to workers = $130,000Utilities (electricity, water, disposal)costs = $8,000Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000Entrepreneur's forgone interest on personal funds used to finance the business = $6,000Creamy Crisp's accounting profit is

A)$302,000.
B)$161,000.
C)$159,000.
D)$18,000.

Question 22

Marginal product is highest where marginal cost is lowest.

Question 23

If start-up firms can quickly shift the short-run cost curves up and to the left, they would improve their chances of becoming profitable.

Question 24

A major factor explaining economies of scale is increased specialization of labor.

Question 25

When a firm increases its output, its average fixed costs will stay constant.

Question 26

When average costs are increasing, marginal costs are greater than average costs.

Question 27

If a firm increases all its inputs by 10 percent and its output increases by 15 percent, the firm is experiencing diseconomies of scale.

Question 28

The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $48,000Annual lease on building = $20,000Annual revenue from operations = $280,000Payments to workers = $118,000Utilities (electricity, water, disposal)costs = $8,000Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000Entrepreneur's forgone interest on personal funds used to finance the business = $6,000Creamy Crisp's explicit costs are

A)$280,000.
B)$146,000.
C)$0.
D)$152,000.

Question 29

The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $40,000Annual lease on building = $25,000Annual revenue from operations = $420,000Payments to workers = $150,000Utilities (electricity, water, disposal)costs = $8,000Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000Entrepreneur's forgone interest on personal funds used to finance the business = $6,000Creamy Crisp's implicit costs, including a normal profit, are

A)$126,000.
B)$183,000.
C)$111,000.
D)$189,000.

Question 30

The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $48,000Annual lease on building = $20,000Annual revenue from operations = $280,000Payments to workers = $118,000Utilities (electricity, water, disposal)costs = $8,000Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000Entrepreneur's forgone interest on personal funds used to finance the business = $6,000Creamy Crisp's economic profit is

A)$280,000.
B)$146,000.
C)$134,000.
D)$0.

Question 31

If a firm doubles its resource inputs and as a result output triples, then the long-run average cost curve must be upward-sloping.

Question 32

Diseconomies of scale are caused by the law of diminishing marginal returns.

Question 33

The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $40,000Annual lease on building = $25,000Annual revenue from operations = $420,000Payments to workers = $150,000Utilities (electricity, water, disposal)costs = $8,000Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000Entrepreneur's forgone interest on personal funds used to finance the business = $6,000Creamy Crisp's total revenues exceed its total costs, including a normal profit, by

A)$309,000.
B)$183,000.
C)$237,000.
D)$111,000.

Question 34

If the minimum efficient scale in an industry were smaller than the size of the market of that industry, then we would have a natural-monopoly situation.

Question 35

Suppose that a business incurred implicit costs of $550,000 and explicit costs of $5 million in a specific year. If the firm sold 100,000 units of its output at $52 per unit, its accounting

A)profits were $520,000 and its economic profits were $30,000.
B)losses were $200,000 and its economic losses were $350,000.
C)profits were $350,000 and its economic profits were $200,000.
D)profits were $200,000 and its economic losses were $350,000.

Question 36

The short-run marginal-cost curve is upward-sloping because of the law of diminishing marginal returns.

Question 37

The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $50,000Annual lease on building = $22,000Annual revenue from operations = $380,000Payments to workers = $120,000Utilities (electricity, water, disposal)costs = $8,000Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000Entrepreneur's forgone interest on personal funds used to finance the business = $6,000Creamy Crisp Donut Company

A)has lower explicit costs, than implicit costs.
B)is earning a normal profit but not an economic profit.
C)is earning an economic profit.
D)is suffering an economic loss, when implicit costs are considered.

Question 38

The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $40,000Annual lease on building = $25,000Annual revenue from operations = $420,000Payments to workers = $150,000Utilities (electricity, water, disposal)costs = $8,000Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000Entrepreneur's forgone interest on personal funds used to finance the business = $6,000Creamy Crisp's total economic costs are

A)$309,000.
B)$183,000.
C)$111,000.
D)$189,000.

Question 39

3-D printers are capable of producing real output like chairs or machine parts using a computer-controlled special printer at low cost even if you produce only one unit of output.

Question 40

One reason why newspaper-publishers' cost per paper increases as their circulation numbers fall is due to diminishing marginal returns.

Question 41

Use the following data to answer the question. When seven units of labor are hired, the marginal product (MP)of the last worker is

A)9.
B)-3.
C)441.
D)18.

Question 42

Harvey quit his job at State University, where he earned $65,000 a year. He figures his entrepreneurial talent or forgone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $70,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 20,000 units of software at $50 for each unit. Of the $50 per unit, $45 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building.The accounting profit of Harvey's firm in the first year was

A)$100,000.
B)$77,000.
C)$23,000.
D)$1,000,000.

Question 43

The question is based on the following table, which provides information on the production of a product that requires one variable input. With the addition of the fifth unit of input, the marginal product is

A)8 and the average product is 50.
B)92 and the average product is 10.
C)8 and the average product is 10.
D)10 and the average product is 8.

Question 44

Suppose that a firm produces 275,000 units a year and sells them all for $8 each. The explicit costs of production are $1,800,000 and the implicit costs of production are $400,000. The firm earns an accounting profit of

A)$400,000 and an economic profit of $0.
B)$2,200,000 and an economic profit of $275,000.
C)$275,000 and an economic profit of $2,200,000.
D)$0 and an economic profit of $400,000.

Question 45

The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $40,000Annual lease on building = $25,000Annual revenue from operations = $420,000Payments to workers = $150,000Utilities (electricity, water, disposal)costs = $8,000Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000Entrepreneur's forgone interest on personal funds used to finance the business = $6,000If, other things equal, Creamy Crisp's revenue fell to $309,000,

A)its implicit costs would exceed its economic costs.
B)it would earn a normal profit but not an economic profit.
C)it would suffer an economic loss.
D)its accounting profit would fall to $0.

Question 46

Answer the question on the basis of the following output data for a firm. Assume that the amounts of all nonlabor resources are fixed. The marginal product of the fourth worker is

A)57.5 units of output.
B)60 units of output.
C)70 units of output.
D)90 units of output.

Question 47

Assume that in the short run a firm is producing 200 units of output, has average total costs of $250, and has average variable costs of $150. The firm's total fixed costs are.

A)$20,000.
B)$2.
C)$0.5.
D)$100.

Question 48

Harvey quit his job at State University, where he earned $62,000 a year. He figures his entrepreneurial talent or forgone entrepreneurial income to be $4,000 a year. To start the business, he cashed in $50,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 10,000 units of software at $72 for each unit. Of the $72 per unit, $60 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building.The economic profits of Harvey's firm in the first year were

A)$120,000.
B)$71,000.
C)$49,000.
D)$720,000.

Question 49

Use the following data to answer the question. The average product (AP)when three units of labor are hired is

A)14.
B)12.
C)108.
D)28.

Question 50

Answer the question on the basis of the following output data for a firm. Assume that the amounts of all nonlabor resources are fixed. The marginal product of the sixth worker is

A)180 units of output.
B)30 units of output.
C)15 units of output.
D)0 units of output.

Question 51

Answer the question on the basis of the following output data for a firm. Assume that the amounts of all nonlabor resources are fixed. Average product is at a maximum when

A)two worker(s)is/are hired.
B)five worker(s)is/are hired.
C)six worker(s)is/are hired.
D)four worker(s)is/are hired.

Question 52

The sole proprietor of the Milwaukee Machine Company receives all accounting profits earned by her firm. She has a standing salary offer of $32,000 a year to work for a large corporation. If she had invested her capital outside her own company, she estimates that would have returned $15,000 this year. If accounting profits for the year were $55,000, then her economic profits were (based solely on the given figures)

A)$102,000.
B)$8,000.
C)$47,000.
D)$-23,000.

Question 53

Answer the question on the basis of the following information. The average product when there are six workers

A)is 1.
B)is 5.67.
C)is 35.
D)cannot be determined from the information given.

Question 54

Answer the question on the basis of the following information. When six workers are employed,

A)marginal product is 4.
B)marginal product is 1.
C)total product is 5.7.
D)average product cannot be determined from the information given.

Question 55

Harvey quit his job at State University, where he earned $58,000 a year. He figures his entrepreneurial talent or forgone entrepreneurial income to be $8,000 a year. To start the business, he cashed in $60,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 15,000 units of software at $60 for each unit. Of the $60 per unit, $50 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building.The implicit costs of Harvey's firm in the first year were

A)$150,000.
B)$72,000.
C)$78,000.
D)$900,000.

Question 56

Harvey quit his job at State University, where he earned $62,000 a year. He figures his entrepreneurial talent or forgone entrepreneurial income to be $4,000 a year. To start the business, he cashed in $50,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 10,000 units of software at $72 for each unit. Of the $72 per unit, $60 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building.The explicit costs of Harvey's firm in the first year were

A)$120,000.
B)$600,000.
C)$49,000.
D)$720,000.

Question 57

Suppose that you could either prepare your own tax return in 8 hours or hire a tax specialist to prepare it for you in 2 hours. You value your time at$20.00an hour; the tax specialist will charge you $45 an hour. The opportunity cost of preparing your own tax return is

A)$250.
B)$45.
C)$90.
D)$160.

Question 58

Answer the question on the basis of the following output data for a firm. Assume that the amounts of all nonlabor resources are fixed. Diminishing marginal returns become evident with the addition of the

A)first worker.
B)fifth worker.
C)sixth worker.
D)second worker.

Question 59

Harvey quit his job at State University, where he earned $45,000 a year. He figures his entrepreneurial talent or forgone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 for each unit. Of the $75 per unit, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building.The total revenues of Harvey's firm in the first year were

A)$220,000.
B)$105,000.
C)$605,000.
D)$825,000.

Question 60

Answer the question on the basis of the following output data for a firm. Assume that the amounts of all nonlabor resources are fixed. What is the firm's average product when four workers are hired?

A)21.5 units of output.
B)43 units of output.
C)41.25units of output.
D)28.75units of output.

Question 61

Assume that in the short run a firm is producing 200 units of output, has average total costs of $250, and has average variable costs of $150. The firm's total variable costs are.

A)$30,000.
B)$50,000.
C)$100.
D)$20,000.

Question 62

Answer the question on the basis of the following cost data. The average variable cost of producing 5 units of output is

A)$7.40.
B)$37.
C)$12.20.
D)$4.80.

Question 63

Round Things, Inc.'s production process exhibits economies of scale. Currently their long-run average cost is $12/unit. If Round Things doubles its use of all inputs, its new long-run average total cost will be

A)$12/unit.
B)less than $12/unit.
C)greater than $24/unit.
D)greater than $12/unit but less than $24/unit.

Question 64

Answer the question on the basis of the following cost data. The average fixed cost of producing 3 units of output is

A)$14.00.
B)$24.
C)$16.00.
D)$8.00.

Question 65

Answer the question on the basis of the following cost data. The total variable cost of producing 5 units of output is

A)$7.40.
B)$37.
C)$12.20.
D)$4.8.

Question 66

Answer the question on the basis of the following cost data. The total cost of eight units of output is

A)$700.00.
B)$93.75.
C)$750.00.
D)$140.00.

Question 67

Plant sizes get larger as you move from ATC-1 to ATC-4. In the long run, the firm should use plant size ATC-3 for what level of output?

A)less than 3,000
B)3,000 to 3,500
C)4,000 to 4,500
D)5,000 to 5,500

Question 68

Which of the following constitutes an implicit cost to the Johnston Manufacturing Company?

A)payments of wages to its office workers
B)rent paid for the use of equipment owned by the Schultz Machinery Company
C)use of savings to pay operating expenses instead of generating interest income
D)economic profits resulting from current production

Question 69

The table shows three short-run cost schedules for three plants of different sizes that a firm might build in the long run. What is the long-run average cost of producing 10 units of output?

A)$10
B)$15
C)$20
D)$45

Question 70

Plant sizes get larger as you move from ATC-1 to ATC-4. Which plant size would produce at the least cost for the 1,500-2,500 range of output?

A)$1
B)$2
C)$3
D)$4

Question 71

Answer the question on the basis of the following cost data. The marginal cost of producing the fifth unit of output is

A)$7.40.
B)$7.
C)$12.20.
D)$37.

Question 72

Suppose that, when producing 50 units of output, a firm's AVC is $30, its AFC is $8, and its MC is $40. This firm's

A)ATC is $48.
B)ATC is $78.
C)total cost is $1,900.
D)total cost is $40.

Question 73

Answer the question on the basis of the following cost data. The marginal cost of the third unit of output is

A)$16.67.
B)$200.00.
C)$40.00.
D)$250.00.

Question 74

Answer the question on the basis of the following cost data. The average total cost of 6 units of output is

A)$79.33.
B)$100.00.
C)$81.70.
D)$8.37.

Question 75

The ABC Corporation decreases all of its inputs by 18 percent and finds that its output falls by 18 percent. This means that initially it was producing

A)in the range of constant returns to scale.
B)in the range of economies of scale.
C)where AP is less than MP.
D)in the range of diseconomies of scale.

Question 76

If a firm increases all of its inputs by 18 percent and its output increases by 14 percent, then

A)it is encountering constant returns to scale.
B)it is encountering economies of scale.
C)it is encountering diseconomies of scale.
D)the firm's long-run ATC curve will be falling.

Question 77

Economic cost can best be defined as

A)any contractual obligation that results in a flow of money expenditures from an enterprise to resource suppliers.
B)any contractual obligation to labor or material suppliers.
C)a payment that must be made to obtain and retain the services of a resource.
D)all costs exclusive of payments to fixed factors of production.

Question 78

Answer the question on the basis of the following cost data. The average total cost of producing 4 units of output is

A)$7.5.
B)$6.
C)$30.
D)$13.5.

Question 79

Assume that in the short run a firm is producing 200 units of output, has average total costs of $250, and has average variable costs of $150. The firm's total costs are.

A)$50,000.
B)$30,000.
C)$100.
D)$20,000.

Question 80

Economic cost can best be defined as

A)any contractual obligation that results in a flow of money expenditures from an enterprise to resource suppliers.
B)those payments for resources that involve an obvious cash transaction.
C)the income the firm must provide to resource suppliers to attract resources from alternative uses.
D)the opportunity cost of using a resource already owned by the firm.