Deck 7: Production and Costs

Question 1

Which of the following is NOT an explicit cost for the owner of a local pizza parlour?

A) pizza ovens
B) other uses for the land that the parlour sits on
C) flour
D) cleaning products

Answer 1

other uses for the land that the parlour sits on

Question 2

How do firms measure their profit?

A) by the sum of total sales revenue
B) by the total value of outstanding shares of stock
C) by subtracting total costs from total revenues
D) by subtracting total revenues from total costs

Answer 2

by subtracting total costs from total revenues

Question 3

When calculating total production costs, what kind of cost is the crucial difference between how economists and accountants analyze the profitability of a business?

A) sunk costs
B) explicit costs
C) implicit costs
D) cash payments

Answer 3

implicit costs

Question 4

Which of the following is an explicit cost?

A) the depreciation of a delivery van
B) the cost of electricity used in a store
C) the cost of the owner's resources
D) the owner's foregone opportunity of running the business

Question 5

Which of the following is an example of an explicit cost of production?

A) the forgone rent that could have been earned if land owned by a firm was not used as its parking lot
B) the cost of the flour for the baker and the forgone labour earnings for an entrepreneur
C) the cost of forgone labour earnings for an entrepreneur
D) the cost of flour for a baker

Question 6

In what way does an economist's measurement of profit differ from an accountant's?

A) Accountants calculate total revenue differently than do economists.
B) Accountants do not always include all of the opportunity costs when calculating total production costs.
C) Economists calculate higher profits for firms as economic profit generally exceeds accounting profit.
D) Economists do not always include all of the opportunity costs when calculating total production costs.

Question 7

There are two types of costs associated with production. Which of the following statements best describes the monetary payment associated with these costs?

A) Implicit costs require monetary payments while explicit costs do not.
B) Both implicit and explicit costs require monetary payments.
C) Explicit costs require monetary payments while implicit costs do not.
D) Neither implicit nor explicit costs require monetary payments.

Question 8

Which of the following best describes sunk costs?

A) They are costs that have already been incurred and cannot be recovered.
B) They are costs that should be included when weighing the marginal costs of production against the marginal benefits received.
C) When sunk costs are added to variable costs, they will equal the total costs of production.
D) They are costs that are relevant to future decisions and should be carefully considered.

Question 9

What is the impact on firms if opportunity costs are ignored?

A) Firms experiencing economic losses may appear to be profitable.
B) Firms will still make profit-maximizing production decisions.
C) All firms will appear to incur economic losses.
D) All firms will show accounting profits.

Question 10

What knowledge about opportunity costs is important to understand?

A) how to calculate the total revenue generated by a firm
B) how to assess the economic profitability of a firm
C) how accountants calculate accounting profits
D) the tax liability of a firm

Question 11

Which of the following best describes the interest paid on a bank loan by a local ice cream producer?

A) It is not considered by an economist when calculating the cost of running the ice cream business.
B) It is an implicit cost for the ice cream producer.
C) It is an explicit cost for the ice cream producer.
D) It is not considered by an accountant when calculating the cost of running the ice cream business.

Question 12

Which of the following is an example of an implicit cost of production?

A) the income an entrepreneur could have earned working for someone else
B) the cost of labour for a farmer who tills his fields
C) the income of a labourer in a factory that assembles DVD players
D) the cost of raw materials used to produce bread in a bakery

Question 13

What do economists normally assume to be the goal of a firm?

A) to maximize sales revenue
B) to sell as many units of output as possible
C) to maximize profits
D) to sell products at the highest prices possible

Question 14

Which of the following is an example of an implicit cost of production?

A) the opportunity cost of space in your home that is used for a home office
B) the wage that high school students could have earned if they worked somewhere else
C) the wages paid to high school students who work in a fast-food restaurant
D) the cost of leather used in manufacturing furniture

Question 15

Scarlett recently began running her husband's lumber mill. Last month she took in $5000 in sales revenue and paid $3400 in out-of-pocket costs. Did the lumberyard make an economic profit last month?

A) Yes. After factoring implicit costs, her profit exceeds $1600.
B) Yes. After considering nonzero explicit and implicit costs, her profit is equal to $1600.
C) No, the lumberyard did not make an economic profit.
D) Without knowing the magnitude of implicit costs, it is not possible to state whether the lumberyard earned an economic profit last month.

Question 16

According to economists, which of the following statements best describes the opportunity cost of a good?

A) It is identical to the good's accounting cost.
B) It is determined strictly by the explicit costs of producing the good.
C) It is determined strictly by the implicit costs of producing the good.
D) It is the value of the best alternative use of resources sacrificed to produce or acquire it.

Question 17

What is an important and often ignored opportunity cost?

A) the cost of missed market opportunities when funds are invested in a firm
B) the cost of utilities used by the firm
C) the cost of accounting services
D) the cost of interest paid to bondholders by the firm

Question 18

On what basis are accounting profits calculated?

A) opportunity costs plus explicit costs
B) implicit cash receipts and actual expenditures of cash
C) actual cash receipts and actual expenditures of cash
D) explicit cash receipts and implicit expenditures of cash

Question 19

If Rocco's Rib Joint took in $35 000 in revenue last week and had out-of-pocket expenses of $31 500, which of the following best describes Rocco's profits last week?

A) Rocco really didn't make any profit since he needs to put the difference between revenue and out-of-pocket expenses back into the firm.
B) Rocco made an economic profit of $3500.
C) It is not clear whether Rocco earned any profit last week because it depends on the magnitude of the implicit costs.
D) Rocco did not earn an economic profit.

Question 20

Which of the following describes an implicit cost?

A) There is no opportunity cost involved.
B) They do not require an outlay of money.
C) Accountants include these costs in total costs.
D) They are an out-of-pocket expense.

Question 21

What is the marginal product of capital equal to?

A) the increase in capital necessary to generate a one-unit increase in output
B) the incremental cost of employing one more unit of physical or human capital
C) the increase in output obtained from a one-unit increase in capital, holding other factors constant
D) the incremental profit associated with selling one more unit of output

Question 22

TABLE 7-1

Refer to Table 7-1. With which additional picker does the marginal product of labour become negative?

A) the fourth
B) the fifth
C) the seventh
D) the ninth

Question 23

What relationship does a production function show?

A) the relationship between variable inputs and outputs
B) the relationship between variable inputs and fixed inputs
C) the relationship between inputs and costs
D) the relationship between costs and outputs

Question 24

What does the production function describe?

A) the relationship between the quantity of inputs utilized and the quantity of output produced
B) the most cost-effective method of combining various inputs in the production process
C) how inputs are most profitably used in production
D) the relationship between a firm's revenue and its level of production

Question 25

Which of the following factors of production is variable in the short run?

A) labour
B) machinery and equipment
C) land
D) the size of the firm's plant

Question 26

Which of the following best describes production in the short run?

A) It can be increased using either labour or capital.
B) It is subject to the law of diminishing marginal product.
C) It may exhibit increasing, decreasing, or constant returns to scale.
D) It is subject to the law of demand.

Question 27

Which of the following does NOT describe the long-run production period?

A) It is a time when all inputs are variable.
B) It is characterized by fixed capital.
C) It is likely longer for a steel manufacturer than for a retailer who sells watches off a cart at the local mall.
D) It varies in length according to how capital goods are specialized.

Question 28

How long is the short run?

A) any period of time less than one month
B) the time frame in which all resources are fixed
C) the time frame in which some resources are fixed
D) any period of time less than one year

Question 29

What is the definition of marginal product of labour?

A) the total output divided by the total labour utilized
B) the change in total output divided by the change in labour, other factors of production held constant
C) the change in profit divided by the change in labour, other factors of production held constant
D) the change in labour utilized divided by the change in total output, other factors of production held constant

Question 30

Which of the following most accurately describes the short-run period?

A) It is a period of time in which the existing firms in the industry do not have sufficient time to adjust the quantity of any inputs that they employ.
B) It is a period of time in which new entrants have sufficient time to build factories and enter the industry.
C) It is a period of time in which the existing firms in the industry do not have sufficient time to adjust their current rate of output.
D) It is a period of time in which the existing firms in the market do not have sufficient time to increase the size of their existing plants or build new factories.

Question 31

When calculating the marginal product of capital, which of the following conditions must be met?

A) The total number of units of capital employed has to be constant.
B) All other inputs must remain fixed.
C) Other inputs must be varied in the same proportion as capital.
D) Total output must be held fixed by assumption.

Question 32

TABLE 7-1

Refer to Table 7-1. With which additional picker does the marginal product of labour begin to diminish?

A) the fourth
B) the fifth
C) the seventh
D) the eighth

Question 33

FIGURE 7-1

Refer to Figure 7-1. What is the marginal product of the second worker hired each week?

A) 10 bicycles
B) 15 bicycles
C) 20 bicycles
D) 30 bicycles

Question 34

TABLE 7-1

Refer to Table 7-1. With which additional picker does the total product of labour diminish?

A) the fourth
B) the fifth
C) the seventh
D) the ninth

Question 35

Why is the short run NOT the same length of time for all firms and industries?

A) because the marginal product of capital begins to diminish at different levels of capital utilization across firms
B) because the average product of labour varies across industries
C) because the life span of capital and the extent of capital specialization will vary across firms and industries
D) because entrepreneurs have different tastes and preferences

Question 36

What relationship does a production function show?

A) the relationship between inputs and the maximum output that can be produced from those inputs
B) the relationship between the production of goods and profits earned from the sale of those goods
C) the relationship between a firm's implicit and explicit costs and revenues they earn from sales
D) the relationship between variable inputs and fixed inputs

Question 37

Which of the following statements best describes costs in the long run?

A) The average fixed cost curve is U-shaped.
B) The average fixed cost exceeds the average variable cost of production.
C) All costs are variable.
D) All costs are fixed.

Question 38

During the short-run period of the production process, which of the following best describes a firm?

A) It is unable to vary all of its factors of production.
B) It is able to vary only some of its factors of production.
C) It is unable to vary any of its factors of production.
D) It is able to vary the size of its plant.

Question 39

Which of the following most accurately describes the long-run period?

A) The long run is of sufficient length to allow a firm to transform economic losses into economic profits.
B) In the long run, the firm is able to expand output by utilizing additional workers and raw materials, but not physical capital.
C) The long run is a period of time in which a firm is unable to vary some of its factors of production.
D) The long run is of sufficient length to allow a firm to alter its plant capacity and all other factors of production.

Question 40

Which of the following best describes the short run?

A) Firms are free to vary all inputs.
B) Firms are able to vary some, but not all, inputs.
C) Firms can vary inputs, but only by varying all inputs in equal proportion.
D) Firms cannot increase production at all.

Question 41

Which of the following is NOT a variable cost of production?

A) the cost of wood used to produce furniture
B) the cost of electricity that powers the lighting and computer systems in an office building
C) the wages paid to nonsalaried employees
D) the property taxes that are paid to the municipal government for the land a plant sits on

Question 42

Which of the following does NOT describe average fixed cost?

A) It is calculated by dividing fixed costs by output.
B) It declines continuously as output increases.
C) It equals the difference between average total cost and average variable cost.
D) It is always less than average variable cost.

Question 43

Which of the following does NOT describe average fixed cost?

A) It is a per unit measure of fixed cost.
B) It can be graphed as a horizontal line, with dollars on the vertical axis and quantity on the horizontal axis.
C) It decreases as output increases.
D) It can be calculated by dividing total fixed cost by the level of output produced.

Question 44

What is total cost?

A) the sum of total variable cost and marginal cost
B) the sum of average fixed cost and marginal cost
C) the sum of total variable cost and total fixed cost
D) the sum of total fixed cost and average variable cost

Question 45

FIGURE 7-1

Refer to Figure 7-1. If the firm's goal is to maximize weekly output, how many workers should the firm employ each week?

A) one worker
B) two workers
C) three workers
D) four workers

Question 46

Which of the following is most likely a variable cost for a business?

A) payments for electricity
B) the lease payment on a warehouse used by the business
C) the loan payment on funds borrowed when a new building is constructed
D) the opportunity cost of the heavy equipment installed in a factory

Question 47

What is the term for costs that vary with output?

A) marginal product
B) fixed costs
C) variable costs
D) overhead costs

Question 48

You operate a factory that produces beach towels. Your current level of output equals 2000 towels per week. Your weekly variable cost equals $8000. If your total cost each week equals $9000, what can you conclude about the fixed costs of production?

A) that the total cost equals $17 000
B) that the total fixed cost equals $8 per towel
C) that the average fixed cost equals 50 cents per towel
D) that the average fixed cost equals $1000

Question 49

Luke Spacewalker realizes that his space taxi service is operating in the region of diminishing marginal product. As he provides more taxi service in the short run, what will happen to the marginal cost of providing the additional service?

A) Marginal cost will increase.
B) Marginal cost will be zero.
C) Marginal cost will stay the same.
D) Marginal cost will decrease.

Question 50

When does diminishing marginal product of labour occur?

A) when adding another unit of labour increases output by a larger margin than the last unit of labour employed
B) when the average product of labour begins to rise
C) when all inputs are varied simultaneously in the same proportion
D) when adding another unit of labour increases output, but not by as large a margin as the last unit of labour employed

Question 51

What does diminishing marginal productivity in a frozen pizza company mean?

A) Hiring additional workers does not change the total output of pizza produced.
B) Hiring additional workers causes the total output of pizza to fall.
C) Hiring additional workers adds fewer and fewer pizzas to total output.
D) The average total cost of production must be decreasing.

Question 52

Which of the following is most likely to be a fixed cost for a business?

A) payment for raw materials used in manufacturing goods
B) interest payments on a loan used to finance the construction of a building
C) wages paid to temporary workers
D) shipping charges for the delivery of products

Question 53

A factory producing CD players finds that its output varies with the number of workers employed each week in the following way: TABLE 7-2

Refer to Table 7-2. What is the marginal product of the fifth worker hired?

A) 18 units of output
B) 20 units of output
C) 94 units of output
D) 112 units of output

Question 54

A factory producing CD players finds that its output varies with the number of workers employed each week in the following way: TABLE 7-2

Refer to Table 7-2. When does marginal product begin to diminish?

A) with the first worker employed
B) with the second worker employed
C) with the third worker employed
D) with the fourth worker employed

Question 55

FIGURE 7-1

Refer to Figure 7-1. When does marginal product begin to diminish?

A) with the first worker hired
B) with the second worker hired
C) with the third worker hired
D) with the fourth worker hired

Question 56

A factory producing motorcycle helmets employs six workers. At the current production level, each worker produces 20 helmets per week. Assuming that labour is the only variable input and that the weekly wage equals $600 per week, what is the average variable cost per helmet?

A) $20
B) $30
C) $100
D) $600

Question 57

What is average fixed cost?

A) the price of a fixed factor of production
B) the total cost divided by the number of units produced over a given period
C) the fixed cost divided by the number of units of a fixed input employed over a given period
D) the total fixed cost divided by the number of units produced over a given period

Question 58

You operate a factory that produces beach towels. Your current level of output equals 2000 towels per week. Your weekly variable cost equals $8000. If your total cost each week equals $9000, what is the average total cost of production per towel?

A) $2
B) $4
C) $4.50
D) $8

Question 59

FIGURE 7-1

Refer to Figure 7-1. What is the marginal product of the fifth worker hired each week?

A) -15 bicycles
B) 0 bicycles
C) 10 bicycles
D) 15 bicycles

Question 60

How are fixed costs best defined?

A) as costs that vary with output
B) as the change in total cost when one more unit of output is produced
C) as costs that do not vary with output
D) as the sum of all marginal costs

Question 61

TABLE 7-5

Refer to Table 7-5. How much are average fixed costs at four units of output?

A) $10
B) $20
C) $30
D) $40

Question 62

Refer to Table 7-4. What is the marginal cost of producing a third watch?

A) $4
B) $5
C) $50
D) $69

Question 63

TABLE 7-5

Refer to Table 7-5. How much are total fixed costs?

A) $20
B) $30
C) $40
D) $50

Question 64

If AVC is subtracted from the ATC, what is the result?

A) accounting profit
B) marginal cost
C) average fixed cost
D) economic profit

Question 65

Don Keene promotes boxing matches. He makes $6500 per fight. Which of the following costs is most relevant to a decision as to whether to promote another fight?

A) the marginal cost of promoting one additional boxing match
B) the average total cost of promoting a boxing match
C) the average fixed cost of promoting a boxing match
D) the total cost of promoting all boxing matches during the year

Question 66

FIGURE 7-2

Refer to Figure 7-2. What does the distance (Y) between the two curves in the diagram represent?

A) The average variable cost of producing five units of output.
B) The total variable cost of producing five units of output.
C) The total cost of producing five units of output.
D) The total fixed cost of producing five units of output.

Question 67

What is the sum of AVC and AFC equal to?

A) average total cost
B) economic profit
C) total variable cost
D) accounting profit

Question 68

FIGURE 7-2

Refer to Figure 7-2. The diagram above shows two cost curves representing short-run total cost and total fixed cost. Which letter represents the total cost curve and the total fixed cost curve?

A) X is the total cost curve, and Y is the total fixed cost curve.
B) Y is the total cost curve, and X is the total fixed cost curve.
C) Y is the total cost curve, and Z is the total fixed cost curve.
D) X is the total cost curve, and Z is the total fixed cost curve.

Question 69

If the short-run average total cost curve is declining, what can we conclude about the marginal cost?

A) Marginal cost is greater than average total cost.
B) Marginal cost is less than average total cost.
C) Marginal cost is less than average variable cost.
D) Marginal cost equals average total cost.

Question 70

Kelly, who grows geraniums to sell, is currently producing a level of output at which her marginal cost equals her average variable cost. Which of the following best describes Kelly's average variable cost at this level of output?

A) It is greater than the average total cost.
B) It is neither at its maximum nor its minimum.
C) It is at a maximum.
D) It is at a minimum.

Question 71

Which of the following most accurately describes what must be occurring if the short-run average total cost is increasing?

A) Total fixed cost must be increasing.
B) Average variable cost must be decreasing.
C) Marginal cost must be greater than average total cost.
D) Average fixed cost must be greater than the marginal cost.

Question 72

What is the term for the change in total cost resulting from a one-unit increase in production?

A) average fixed cost
B) average opportunity cost
C) average variable cost
D) marginal cost

Question 73

A firm's average fixed cost when producing 2000 units of output equals $10. When only 1000 units of output are produced, what is the average fixed cost?

A) $5
B) $10
C) $20
D) $25

Question 74

Refer to Table 7-4. If the output equals five watches per week, what is the average fixed cost and average variable cost of production?

A) AFC is $50 and AVC is $45
B) AFC is $9 and AVC is $10
C) AFC is $10 and AVC is $9
D) AFC is $45 and AVC is $50

Question 75

The table below shows how total cost varies with output in a factory producing watches.
TABLE 7-4

Refer to Table 7-4. If the output equals four watches per week, then what is the average total cost of producing a watch?

A) $3
B) $5.50
C) $18
D) $72

Question 76

TABLE 7-3

Refer to Table 7-3. What is the level of the firm's total fixed cost (in thousands)?

A) $0
B) $5
C) $8
D) $25

Question 77

Which of the following best describes total variable costs?

A) They increase as production increases.
B) They decrease as production increases.
C) They are costs associated with short-run fixed capital.
D) They are so named because they vary from firm to firm within an industry.

Question 78

TABLE 7-3

Refer to Table 7-3. At what level of output (in thousands) is average total cost minimized?

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

Question 79

What is the definition of the marginal cost of a good?

A) It is decreasing whenever average total cost is decreasing.
B) It is the addition to total cost from producing one more unit of output.
C) It is always equal to average variable cost when the firm is maximizing profit.
D) It is the difference between average total cost and average variable cost.

Question 80

A firm's total fixed cost equals $2500. What would the firm's average fixed cost be at 10 units of output?

A) $2.50
B) $250
C) $2500
D) $25 000