Deck 7: Production and Costs

Question 1

An economic institution that combines factors of production into outputs for consumers is a(n)

A) industry.
B) plant.
C) firm.
D) multinational corporation.

Answer 1

C

Question 2

A firm is an economic institution that transforms _____ of production into _____ for consumers.

A) inputs; outputs
B) inputs; resources
C) factors; inputs
D) outputs; outputs

Answer 2

A

Question 3

Which goal BEST explains why entrepreneurs seek to meet a market need?

A) to earn a profit
B) to show altruism
C) to meet a legal requirement
D) to find their life's purpose

Answer 3

A

Question 4

_____ possess most of the legal rights of individuals and can issue stock to raise capital.

A) Sole proprietors
B) Partnerships
C) Corporations
D) Sole proprietors, partnerships, and corporations

Question 5

Jim Delaney employs five people to make pizzas for his neighborhood. He makes $4,000 in profit per month, which he pays to himself. This firm is an example of a

A) sole proprietorship.
B) partnership because he has five employees.
C) corporation because he sells his pizzas to the public.
D) nonprofit corporation.

Question 6

Which statement regarding American businesses is TRUE?

A) Most American businesses are corporations.
B) Most American businesses are partnerships.
C) Corporations sell most of their products and services in the United States.
D) Sole proprietorships sell most of their products and services in the United States.

Question 7

Sole proprietors and partnerships share the characteristic of

A) the ability to raise large amounts of capital.
B) unlimited liability.
C) being difficult to establish.
D) issuing stock.

Question 8

_____ are more numerous, but _____ sell more goods and services.

A) Corporations; partnerships
B) Corporations; sole proprietorships
C) Sole proprietorships; corporations
D) Corporations; entrepreneurs

Question 9

Which is an advantage of owning a sole proprietorship?

A) unlimited liability
B) easiness of start up
C) difficulty in raising large amounts of capital
D) having full responsibility for all aspects of the business

Question 10

The characteristic of a corporation that MOST encourages investors to invest large amounts of money in it is

A) double taxation.
B) limited liability.
C) diffusion of ownership.
D) access to international markets.

Question 11

Limited liability is important in encouraging business investment because

A) it reduces income taxes.
B) it lowers risks to those contributing funds to the venture.
C) any funds contributed to a limited liability company earn a high return.
D) it raises the liquidity of funds.

Question 12

How are corporations different from partnerships?

A) Corporations are an example of a firm, but partnerships are not.
B) Corporations have limited liability, but partnerships have unlimited liability.
C) Corporations transform factors of production into products for consumers, but partnerships do not.
D) Partnerships have the legal rights of individuals, but corporations do not.

Question 13

Jim Delaney sold his pizza firm to an investor who then sold stock to the public. Jim now earns a salary of $5,000 a month and all the profits are distributed to the stockholders. This firm is an example of a

A) sole proprietorship.
B) partnership because Jim Delaney partnered with investors.
C) corporation.
D) nonprofit corporation.

Question 14

Eve runs a yoga studio. She is considering expanding her operation, but to do so, she needs to double the size of her existing building. She is concerned that her insurance will increase significantly due to the increased exposure to liability. And she alone would bear the burden of that if an accident were to occur. Based on the above information, Eve's studio should be considered a _____ and the decision to expand a _____ decision.

A) partnership; short-run
B) corporation; long-run
C) sole proprietor; long-run
D) partnership; long-run

Question 15

Blast-Off owns a nuclear power plant in northern Utah that suffers a nuclear accident causing $50 billion in damages. Blast-Off declares bankruptcy and pays out $5 billion in damages, but it is no longer liable for any further damages. From this information, it is clear that before the bankruptcy, the nuclear power plant was a

A) sole proprietorship.
B) partnership.
C) corporation.
D) nonprofit corporation.

Question 16

The limited ability to raise capital is a disadvantage of what type of business structure?

A) sole proprietorship
B) partnership
C) corporation
D) government-owned business

Question 17

What do all three types of business structure have in common?

A) They all have limited liability.
B) They all can sell stock.
C) They all dissolve upon the death of the chief executive officer.
D) They all react to the profit incentives of the market.

Question 18

In a partnership, legal responsibility for all debts of the partnership is

A) shared by the founding owners.
B) shared by all the partners.
C) shared by the stockholders.
D) limited to the investment in the partnership.

Question 19

A partnership of two people has which characteristic?

A) The law releases each partner from legal liabilities.
B) Each person has 50% liability.
C) Each person has unlimited liability.
D) It is much more difficult for a company to specialize with two persons.

Question 20

Ownership in corporations is issued in the form of

A) partnership agreements.
B) loan documents.
C) bonds.
D) shares of stock.

Question 21

Craig and his friend Jay own Cut Rate Legal Services. They make $16,190 in profits per month, which they split between themselves. Craig and Jay carry a hefty insurance policy because they have unlimited liability. Cut Rate Legal Services is an example of a

A) sole proprietorship.
B) partnership.
C) corporation.
D) limited liability company.

Question 22

A customer slipped and fell on a wet floor at Melvin's T-Shirt Emporium. Melvin was found liable for the customer's injuries and had to pay $30,000 in medical bills for the customer out of his own pocket. Melvin's T-Shirt Emporium is a

A) sole proprietorship.
B) partnership.
C) corporation.
D) limited liability company.

Question 23

Ian owned his own dry cleaning shop, but he later sold it to his cousin Leighton. Leighton incorporated the business and is the only stockholder. Which of these is the MOST likely reason for the incorporation?

A) Leighton wanted to sell shares of stock to raise capital.
B) Leighton wanted to be able to hire workers.
C) Leighton wanted to have limited liability.
D) Leighton wanted to be able to sell the business when he retired.

Question 24

Profits are equal to the difference between _____ revenue and _____ costs.

A) total; marginal
B) marginal; marginal
C) total; total
D) total; explicit

Question 25

Economists explicitly assume that the primary objective of firms is to maximize

A) sales.
B) market share.
C) shareholder wealth.
D) profits.

Question 26

Most economists assume that firms behave _____ and that their objective is _____.

A) rationally; profit maximization
B) rationally; predictable profits
C) irrationally; profit maximization
D) rationally; sales maximization

Question 27

Economists assume that firms try to _____. Other theories suggest that firms might, among other things, try to _____.

A) maximize revenue; maximize profits
B) maximize profits; maximize sales
C) maximize market share; maximize satisfactory profits
D) maximize satisfactory profits; maximize market share

Question 28

The price of a mango is $2 and a farmer sells 2,000 mangos. However, the costs to the farmer are $400 for labor; $1,600 for rent; and $2,000 for advertising. Based on the above information, the farmer

A) makes $2,000 in profit.
B) loses $2,000 in profit.
C) makes $2,000 in total revenue.
D) makes $4,000 in total revenue.

Question 29

All of these are explicit costs, EXCEPT

A) salaries paid to employees.
B) business taxes paid by an entrepreneur.
C) the salary an entrepreneur could have earned in a corporate job.
D) money paid for raw materials.

Question 30

Economic profit is total revenue minus

A) implicit costs.
B) explicit costs.
C) implicit and explicit costs.
D) normal profits.

Question 31

Which is an implicit cost?

A) material cost
B) labor cost
C) opportunity cost
D) overhead cost

Question 32

Economic costs are the sum of _____ costs and _____ costs.

A) sunk; implicit
B) explicit; implicit
C) explicit; sunk
D) sunk; marginal

Question 33

All of these are included in implicit costs EXCEPT

A) salary that would have been earned at another job.
B) interest that is foregone from capital invested.
C) opportunity costs.
D) expenditures for raw materials.

Question 34

Money that is a real cost to the company but that is not actually paid at the time a machine wears down but when it is replaced is an example of a(n) _____ cost.

A) explicit
B) implicit
C) sunk
D) total

Question 35

Explicit costs are called _____ costs, and implicit costs are _____ costs.

A) sunk; opportunity
B) opportunity; out-of-pocket
C) out-of-pocket; opportunity
D) opportunity; sunk

Question 36

Economists calculate profits as total revenue minus

A) depreciation.
B) the sum of explicit and implicit costs.
C) the sum of explicit costs and depreciation.
D) raw material costs.

Question 37

Which is NOT considered an explicit cost?

A) electricity
B) opportunity cost of capital
C) liability insurance
D) rent

Question 38

A normal rate of return on capital

A) is a return just sufficient to keep investors satisfied.
B) sends a signal to investors to move their capital elsewhere.
C) does not allow a business to keep its capital equipment in the long run.
D) represents positive economic profit.

Question 39

Money that a firm spends on health care for employees is a(n) _____ cost.

A) explicit
B) implicit
C) opportunity
D) surplus

Question 40

The cost incurred by a firm through the foregone earnings on capital invested is a(n) _____ cost.

A) explicit
B) implicit
C) sunk
D) surplus

Question 41

All of these are examples of implicit costs EXCEPT

A) office rent expenses.
B) the value of next best alternative use of an entrepreneur's time.
C) earnings that an entrepreneur could have made in another job.
D) opportunity cost of a firm's capital.

Question 42

Which is NOT an explicit cost?

A) lease payments
B) insurance
C) office supplies
D) salary that a business owner could have earned at an alternate job

Question 43

Atomic Café has just opened a new, larger store across the street from its original location. Which cost is a sunk cost for the café?

A) the higher electricity bill at the new larger location
B) the additional thirty days of rent it had to pay for its old space due to construction delays in the new space, even though it only occupied the old space for five additional days
C) the additional labor cost needed to staff the larger café
D) the increased cost of electricity due to the larger space

Question 44

Costs that cannot be recovered are _____ costs.

A) implicit
B) explicit
C) sunk
D) resource

Question 45

Which of these events occur in the short run?

A) Walmart opens a new store.
B) Walmart hires five new workers.
C) A new firm enters the retail industry.
D) Two firms leave the retail industry.

Question 46

Money spent by a politician for a pollster who would determine the chances of the politician's winning an upcoming local election is a(n) _____ cost.

A) indirect
B) implicit
C) sunk
D) surplus

Question 47

Charlotte lives in a house but also owns an apartment unit she has rented out for four years to help finance her son Ty's college tuition. After Ty graduated and moved back home, Charlotte did not renew the rental contract and instead allowed Ty to move into the unit rent-free while he searches for a job. For Charlotte, Ty moving into the former rental unit is a(n) _____ cost.

A) explicit
B) sunk
C) altruistic
D) implicit

Question 48

Suppose a fast-food restaurant currently serves lunch and dinner and is trying to determine if it should open for breakfast. Which cost is a sunk cost for this business?

A) a newspaper advertisement promoting breakfast
B) costs of the food items bought for breakfast
C) costs of the workers hired for the morning shift
D) electricity for morning hours

Question 49

The phrase "Stop throwing good money after bad" best describes advice given to ignore _____ costs.

A) implicit
B) sunk
C) marginal
D) variable

Question 50

If you drop a course after the refund date, the nonrefundable tuition that you have paid is best described as a _____ cost.

A) variable
B) marginal
C) fixed
D) sunk

Question 51

Profits that are calculated factoring both implicit and explicit costs are called _____ profits.

A) accounting
B) normal
C) economic
D) financial

Question 52

Suppose that Milo left a job, where he earned a salary of $50,000 per year, in order to open an all-natural soap business. His insurance cost is $5,000; his material cost is $25,000; his lease payments are $10,000; and his revenue is $90,000. Milo's economic profit is

A) $50,000.
B) $90,000.
C) $40,000.
D) $0.

Question 53

Suppose that Milo left a job, where he earned a salary of $50,000 per year, in order to open an all-natural soap business. His insurance cost is $5,000; his material cost is $25,000; his lease payments are $10,000; and his revenue is $90,000. Milo's accounting profit is

A) $50,000.
B) $90,000.
C) $40,000.
D) $0.

Question 54

Suppose that Milo left a job, where he earned a salary of $50,000 per year, in order to open an all-natural soap business. His insurance cost is $5,000; his material cost is $25,000; his lease payments are $10,000; and his revenue is $90,000. Milo's earns _____ profit.

A) positive economic
B) negative economic
C) normal
D) zero accounting

Question 55

Jada left a job that paid $40,000 per year. At the end of her first year in business, her revenues summed to $90,000, and her explicit costs were $50,000. Also, in order to fund her business startup, Jada cashed in a $20,000 certificate of deposit that was providing an annual yield of 5%. Ceteris paribus, Jada's economic profit is

A) $40,000.
B) $1,000.
C) -$1,000.
D) $0.

Question 56

Jada left a job that paid $40,000 per year. At the end of her first year in business, her revenues summed to $90,000, and her explicit costs were $50,000. Also, in order to fund her business startup, Jada cashed in a $20,000 certificate of deposit that was providing an annual yield of 5%. Ceteris paribus, Jada's accounting profit is

A) $40,000.
B) $1,000.
C) -$1,000.
D) $0.

Question 57

Jada left a job that paid $40,000 per year. At the end of her first year in business, her revenues summed to $90,000, and her explicit costs were $50,000. Also, in order to fund her business startup, Jada cashed in a $20,000 certificate of deposit that was providing an annual yield of 5%. Ceteris paribus, Jada earns _____ profit.

A) normal
B) negative economic
C) positive economic
D) zero accounting

Question 58

Wendy leaves her job as a ballet dancer to open her own dance studio. As a dancer, she earned $54,000 per year. During the studio's first year of business, Wendy paid $3,000 per year for insurance; $2,500 for music and licensing fees; $750 for equipment; and $15,500 for rent and utilities. She received $85,250 in tuition payments. Wendy's economic profit is

A) $21,750.
B) $9,500.
C) $63,500.
D) $31,250.

Question 59

Wendy leaves her job as a ballet dancer to open her own dance studio. As a dancer, she earned $54,000 per year. During the studio's first year of business, Wendy paid $3,000 per year for insurance; $2,500 for music and licensing fees; $750 for equipment; and $15,500 for rent and utilities. She received $85,250 in tuition payments. Wendy's accounting profit is

A) $21,750.
B) $9,500.
C) $63,500.
D) $31,250.

Question 60

Wendy leaves her job as a ballet dancer to open her own dance studio. As a dancer, she earned $54,000 per year. During the studio's first year of business, Wendy paid $3,000 per year for insurance; $2,500 for music and licensing fees; $750 for equipment; and $15,500 for rent and utilities. She received $85,250 in tuition payments. Wendy earns _____ profit.

A) negative economic
B) zero economic
C) normal
D) positive economic

Question 61

Zhen left a job as an accountant making $80,000 a year to open his own business. Zhen now owns his own accounting firm and employs three bookkeepers to help manage his accounts. His total revenue this year was $525,000. Because he is well known for his estate planning and expertise, he is also paid $16,000 per year by a local news station to answer tax questions on their weekly Ask the Accountant segment. His explicit costs for payroll, insurance, taxes, mortgage, and utilities are $390,000. Zhen's economic profit is

A) $71,000.
B) $541,000.
C) $151,000.
D) $55,000.

Question 62

Zhen left a job as an accountant making $80,000 a year to open his own business. Zhen now owns his own accounting firm and employs three book keepers to help manage his accounts. His total revenue this year was $525,000. Because he is well known for his estate planning and expertise, he is also paid $16,000 per year by a local news station to answer tax questions on their weekly Ask the Accountant segment. His explicit costs for payroll, insurance, taxes, mortgage, and utilities are $390,000. Zhen's accounting profit is

A) $71,000.
B) $541,000.
C) $151,000.
D) $135,000.

Question 63

Micah has decided to leave his $70,000-a-year landscape design job and open a new kayak business. His insurance cost is expected to be $2,000 per year. The kayaks he owns are valued at $25,000, and he books 20% annual depreciation on them. He will also use building space that he owns, but to do so, he must give up the $20,000 per year in rent he used to receive for the space. He forecasts first-year revenue to be $100,000. Micah's estimated economic profit is

A) -$22,000.
B) $3,000.
C) -$20,000.
D) $5,000.

Question 64

Micah has decided to leave his $70,000-a-year landscape design job and open a new kayak business. His insurance cost is expected to be $2,000 per year. The kayaks he owns are valued at $25,000, but he experiences 20% annual depreciation on them. He will also use building space that he owns, but to do so, he must give up the $20,000 per year in rent he used to receive for the space. He forecasts first-year revenue to be $100,000. Micah's estimated accounting profit is

A) $78,000.
B) $73,000.
C) $98,000.
D) $68,000.

Question 65

Micah has decided to leave his $70,000-a-year landscape design job and open a new kayak business. His insurance cost is expected to be $2,000 per year. The kayaks he owns are valued at $25,000, but he experiences 20% annual depreciation on them. He will also use building space that he owns, but to do so, he must give up the $20,000 per year in rent he used to receive for the space. He forecasts first-year revenue to be $100,000. Micah is estimated to earn _____ accounting profit and _____ economic profit.

A) negative; positive
B) positive; negative
C) positive; positive
D) negative; negative

Question 66

Normal profit is

A) positive economic profit.
B) just sufficient to keep a firm in business over the long run.
C) negative economic profit.
D) zero accounting profit.

Question 67

Which statement is NOT true?

A) Normal profit is the same as accounting profit.
B) Economic profit cannot be measured by accounting methods.
C) Normal profit is equal to zero economic profit.
D) Economic profit is always smaller than accounting profit.

Question 68

Which equation is correct?

A) Economic profit = Total revenue - Implicit costs
B) Economic profit = Total revenue - Opportunity costs - Implicit costs
C) Economic profit = Total revenue - Normal costs
D) Economic profit = Total revenue - Explicit costs - Implicit costs

Question 69

Which equation is correct?

A) Economic profit = Total revenue - Opportunity costs - Explicit costs
B) Economic profit = Total revenue - Opportunity costs - Implicit costs
C) Economic profit = Total revenue - Implicit costs
D) Economic profit = Total revenue - Sunk costs - Implicit costs

Question 70

Which equation is correct?

A) Economic profit = Total revenue - Accounting costs
B) Explicit costs = Total revenue - Accounting profit
C) Economic profit = Total revenue - Implicit costs
D) Economic profit = Total revenue - Sunk costs - Accounting costs

Question 71

Profit in excess of both explicit and implicit costs is _____ profit.

A) normal
B) accounting
C) economic
D) zero economic

Question 72

Arlene makes earrings in the shape of the mascot of a local university. Last year, Arlene made 250 pairs of earrings, which she sold to the university bookstore for $10 each. Arlene works out of her home; her only cost is $3 per pair of earrings for materials and $85 for tax help. If Arlene did not produce earrings, she would spend her time babysitting her nephews and make about $500 per year. Which statement is TRUE?

A) Arlene's economic profit is $1,665.
B) Arlene's total revenue is $2,500.
C) Arlene's total implicit costs are $835.
D) Arlene's accounting profit is $1,165.

Question 73

Normal profit is equal to

A) revenue minus explicit cost.
B) revenue minus opportunity cost.
C) zero economic profit.
D) explicit cost minus implicit cost.

Question 74

A local business earned total revenue of $100,000 against economic costs of $85,000, with the difference going to investors. If investors put in $200,000 and expect a 5% return on their investment, this business is earning a _____ economic profit.

A) positive
B) normal
C) negative
D) positive accounting profit but negative

Question 75

A local business earned total revenue of $100,000 against economic costs of $85,000 this year. This firm's accounting profit

A) cannot be determined without more information.
B) is zero.
C) is negative.
D) is positive.

Question 76

In economic terms, the short run is

A) no more than six months.
B) no more than two years.
C) the time period during which at least one factor of production is fixed.
D) the time period during which all factors of production are variable.

Question 77

Which factor of production is usually assumed to be variable in the short run?

A) state of technology
B) number of machines
C) length of workers' shifts
D) plant capacity

Question 78

Which of these is NOT typical of the long run?

A) Firms may enter or leave the industry.
B) A firm may add facilities.
C) Output will vary only with changes in the labor force.
D) The size of an industry may change.

Question 79

In terms of the actual time period, the long run is probably the shortest for a(n)

A) furniture manufacturer.
B) large public utility company.
C) airline.
D) boutique bakery.

Question 80

Which example represents the short run?

A) Walmart builds another store.
B) Ford asks its workers to work overtime.
C) FedEx increases the size of its trucking fleet by 20%.
D) A university builds two classroom buildings.