Deck 13: The Costs of Production

Question 1

Economists normally assume that the goal of a firm is to (i) sell as much of their product as possible.
(ii) set the price of their product as high as possible.
(iii) maximize profit.

A)(i) and (ii) are true.
B)(ii) and (iii) are true.
C)(iii) is true.
D)(i) and (iii) are true.

Answer 1

C

Question 2

Which of the following is an implicit cost? (i) the owner of a firm forgoing an opportunity to earn a large salary working for a Wall Street brokerage firm
(ii) interest paid on the firm's debt
(iii) rent paid by the firm to lease office space

A)(ii) and (iii)
B)(i) and (iii)
C)(i) only
D)(iii) only

Answer 2

C

Question 3

The amount of money that a firm pays to buy inputs is called

A)total cost.
B)variable cost.
C)marginal cost.
D)fixed cost.

Answer 3

A

Question 4

Explicit costs

A)require an outlay of money by the firm.
B)include all of the firm's opportunity costs.
C)include income that is forgone by the firm's owners.
D)Both b and c are correct.

Question 5

Economic profit is equal to

A)total revenue minus the explicit cost of producing goods and services.
B)total revenue minus the opportunity cost of producing goods and services.
C)total revenue minus the accounting cost of producing goods and services.
D)average revenue minus the average cost of producing the last unit of a good or service.

Question 6

According to the law of supply,

A)firms' production levels are not correlated with the price of a good.
B)the supply curve will slope downward when demand decreases.
C)firms are willing to produce a greater quantity of a good when the price of the good is higher.
D)the supply curve identifies the points where the firm minimizes its marginal costs.

Question 7

The amount of money that a wheat farmer could have earned if he had planted barley instead of wheat is

A)an explicit cost.
B)an accounting cost
C)an implicit cost.
D)forgone accounting profit.

Question 8

Those things that must be forgone to acquire a good are called

A)substitutes.
B)opportunity costs.
C)explicit costs.
D)competitors.

Question 9

XYZ corporation produced 300 units of output but sold only 275 of the units it produced.The average cost of production for each unit of output produced was $100.Each of the 275 units sold was sold for a price of $95.Total profit for the XYZ corporation would be

A)-$3,875.
B)$26,125.
C)$28,500.
D)$30,000.

Question 10

To an economist,the field of industrial organization answers which of the following questions?

A)Why are consumers subject to the law of demand?
B)Why do firms experience falling marginal product of labor?
C)How does the difference in the number of firms affect prices and the efficiency of market outcomes?
D)Why do firms consider production costs when determining product supply?

Question 11

Which of the following would be categorized as an implicit cost? (i) forgone investment opportunities
(ii) wages of workers
(iii) raw materials costs

A)(i)
B)(ii)
C)(ii) and (iii)
D)(i) and (iii).

Question 12

Scenario 13-1
Joe wants to start his own business. The business he wants to start will require that he purchase a factory that costs $400,000. Joe currently has $500,000 in the bank earning 3 percent interest per year.
Refer to Scenario 13-1.Suppose Joe purchases the factory using $200,000 of his own money and $200,000 borrowed from a bank at an interest rate of 6 percent.What is Joe's annual opportunity cost of purchasing the factory?

A)$3,000
B)$6,000
C)$15,000
D)$18,000

Question 13

Industrial organization is the study of how

A)labor unions organize workers in industries.
B)profitable firms are in organized industries.
C)industries organize for political advantage.
D)firms' decisions regarding prices and quantities depend on the market conditions they face.

Question 14

Economists normally assume that the goal of a firm is to (i) make profit as large as possible even if it means reducing output.
(ii) make profit as large as possible even if it means incurring a higher total cost.
(iii) make revenue as large as possible.

A)(i) and (ii) are true.
B)(i) and (iii) are true.
C)(ii) and (iii) are true.
D)(i), (ii), and (iii) are true.

Question 15

The amount of money that a firm receives from the sale of its output is called

A)total gross profit.
B)total net profit.
C)total revenue.
D)net revenue.

Question 16

Profit is defined as

A)net revenue minus depreciation.
B)total revenue minus total cost.
C)average revenue minus average total cost.
D)marginal revenue minus marginal cost.

Question 17

Scenario 13-1
Joe wants to start his own business. The business he wants to start will require that he purchase a factory that costs $400,000. Joe currently has $500,000 in the bank earning 3 percent interest per year.
Refer to Scenario 13-1.If Joe purchases the factory with his own money,what is the annual implicit opportunity cost of purchasing the factory?

A)$0
B)$3,000
C)$12,000
D)$15,000

Question 18

Which of the following can be added to profit to obtain total revenue?

A)net profit
B)capital profit
C)operational profit
D)total cost

Question 19

An example of an explicit cost of production would be

A)the cost of forgone labor earnings for an entrepreneur.
B)the lost opportunity to invest in capital markets when the money is invested in one's business.
C)lease payments for the land on which a firm's factory stands.
D)Both a and c are correct.

Question 20

John owns a shoe-shine business.His accountant most likely includes which of the following costs on his financial statements?

A)wages John could earn washing windows
B)dividends John's money was earning in the stock market before John sold his stock and bought a shoe-shine booth
C)the cost of shoe polish
D)Both b and c are correct.

Question 21

Explicit costs

A)do not require an outlay of money by the firm.
B)enter into the accountant's measurement of a firm's profit.
C)enter into the economist's measurement of a firm's profit.
D)Both b and c are correct.

Question 22

Scenario 13-2
Zach took $400,000 out of the bank and used it to start his new cookie business. The bank account pays 3 percent interest per year. During the first year of his business, Zach sold 6,000 boxes of cookies for $2.50 per box. Also, during the first year, the cookie business incurred costs that required outlays of money amounting to $9,000.
Refer to Scenario 13-2.Zach's accounting profit for the year was

A)$-494,000.
B)$-6,000.
C)$6,000.
D)$12,000.

Question 23

Economists normally assume that the goal of a firm is to

A)maximize its total revenue.
B)maximize its profit.
C)minimize its explicit costs.
D)minimize its total cost.

Question 24

When calculating a firm's profit,an economist

A)will subtract only explicit costs from total revenue since these are the only costs that can be measured explicitly.
B)will subtract only implicit costs from total revenue since these include both the costs that can be directly measured as well as the costs that can be indirectly measured.
C)will subtract only the opportunity costs from total revenue since these include both the implicit and explicit costs of the firm.
D)will subtract only the marginal cost since the cost of the next unit is the only relevant cost.

Question 25

Which of the following expressions is correct?

A)accounting profit = economic profit + implicit costs
B)accounting profit = total revenue - implicit costs
C)economic profit = accounting profit + explicit costs
D)economic profit = total revenue - implicit costs

Question 26

Scenario 13-3
Tony is a wheat farmer, but he also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat.
Refer to Scenario 13-3.What is the total opportunity cost of the day that Farmer Tony incurred for his spring day in the field planting wheat?

A)$130
B)$250
C)$300
D)$380

Question 27

Accounting profit is equal to

A)marginal revenue minus marginal cost.
B)total revenue minus the explicit cost of producing goods and services.
C)total revenue minus the opportunity cost of producing goods and services.
D)average revenue minus the average cost of producing the last unit of a good or service.

Question 28

Scenario 13-3
Tony is a wheat farmer, but he also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat.
Refer to Scenario 13-3.Tony's economic profit equals

A)$-130
B)$-80
C)$130
D)$170

Question 29

Gordon is a senior majoring in computer network development at Smart State University.While he has been attending college,Gordon started a computer consulting business to help senior citizens set up their network connections and teach them how to use e-mail.Gordon charges $25 per hour for his consulting services.Gordon also works 5 hours a week for the Economics Department to maintain that department's Web page.The Economics Department pays Gordon $20 per hour.From this information we can conclude:

A)Gordon should increase the number of hours he works for the Economics Department to make it comparable to his consulting business income.
B)Gordon is obviously not maximizing his well-being if he continues to work for the Economics Department.
C)If Gordon chooses one hour at the beach with his friends rather than spend one more hour with a consulting client, the forgone income of $25 is considered a cost of the choice to go to the beach.
D)Both b and c are correct

Question 30

A certain firm manufactures and sells computer chips.Last year it sold 2 million chips at a price of $10 per chip.For last year,the firm's

A)accounting profit amounted to $20 million.
B)economic profit amounted to $20 million.
C)total revenue amounted to $20 million.
D)explicit costs amounted to $20 million.

Question 31

Economic profit

A)will never exceed accounting profit.
B)is most often equal to accounting profit.
C)is always at least as large as accounting profit.
D)is a less complete measure of profitability than accounting profit.

Question 32

Scenario 13-3
Tony is a wheat farmer, but he also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat.
Refer to Scenario 13-3.Tony's accounting profit equals

A)$-80
B)$130
C)$170
D)$260

Question 33

Scenario 13-3
Tony is a wheat farmer, but he also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat.
Refer to Scenario 13-3.Tony's accountant would most likely figure the total cost of his wheat planting to equal

A)$25
B)$130
C)$300
D)$380

Question 34

To an economist,it is conceivable that the objective that motivates an individual entrepreneur to start a business arises from

A)an innate love for the type of business that he or she starts.
B)a desire to earn a profit.
C)an altruistic desire to provide the world with a good product.
D)All of the above are correct.

Question 35

Dolores used to work as a high school teacher for $40,000 per year but quit in order to start her own catering business.To buy the necessary equipment,she withdrew $20,000 from her savings,(which paid 3 percent interest)and borrowed $30,000 from her uncle,whom she pays 3 percent interest per year.Last year she paid $25,000 for ingredients and had revenue of $60,000.She asked Louis the accountant and Greg the economist to calculate her profit for her.

A)Louis says her profit is $34,100 and Greg says her profit is $6,500.
B)Louis says her profit is $34,100 and Greg says she lost $6,500.
C)Louis says her profit is $35,000 and Greg says she lost $5,000.
D)Louis says her profit is $33,500 and Greg says her profit is 33,500.

Question 36

Scenario 13-2
Zach took $400,000 out of the bank and used it to start his new cookie business. The bank account pays 3 percent interest per year. During the first year of his business, Zach sold 6,000 boxes of cookies for $2.50 per box. Also, during the first year, the cookie business incurred costs that required outlays of money amounting to $9,000.
Refer to Scenario 13-2.Zach's economic profit for the year was

A)$-506,000.
B)$-6,000.
C)$3,000.
D)$6,000.

Question 37

Which of the following expressions is correct?

A)accounting profit = total revenue - explicit costs
B)economic profit = total revenue - implicit costs
C)economic profit = total revenue - explicit costs
D)Both a and b are correct.

Question 38

Susan used to work as a telemarketer,earning $25,000 per year.She gave up that job to start a catering business.In calculating the economic profit of her catering business,the $25,000 income that she gave up is counted as part of the catering firm's

A)total revenue.
B)opportunity costs.
C)explicit costs.
D)marginal costs.

Question 39

A firm's opportunity costs of production amount to its

A)explicit costs only.
B)implicit costs only.
C)explicit costs + implicit costs.
D)explicit costs + implicit costs + total revenue.

Question 40

When a firm is making a profit-maximizing production decision,which of the following principles of economics is likely to be most important to the firm's decision?

A)The cost of something is what you give up to get it.
B)A country's standard of living depends on its ability to produce goods and services.
C)Prices rise when the government prints too much money.
D)Governments can sometimes improve market outcomes.

Question 41

The difference between accounting profit and economic profit relates to

A)the manner in which revenues are defined.
B)how total revenue is calculated.
C)the manner in which costs are defined.
D)the price of the good in the market.

Question 42

A production function is a relationship between

A)inputs and quantity of output.
B)inputs and revenue.
C)inputs and costs.
D)inputs and profit.

Question 43

Samantha has been working for a law firm and earning an annual salary of $80,000.She decides to open her own practice.Her annual expenses will include $15,000 for office rent,$3,000 for equipment rental,$1,000 for supplies,$1,200 for utilities,and a $35,000 salary for a secretary/bookkeeper.Samantha will cover her start-up expenses by cashing in a $20,000 certificate of deposit on which she was earning annual interest of $500.Assuming that there are no additional expenses,Samantha's annual implicit costs will equal

A)$55,200.
B)$75,200.
C)$80,500.
D)$165,700.

Question 44

Figure 13-1
The figure below depicts a production function for a firm that produces cookies.

Refer to Figure 13-1.As the number of workers increases,

A)total output increases, but at a decreasing rate.
B)marginal product increases, but at a decreasing rate.
C)marginal product increases at an increasing rate.
D)total output decreases.

Question 45

Jane decides to open her own business and earns $50,000 in accounting profit the first year.When deciding to open her own business she turned down three separate job offers with annual salaries of $30,000,$40,000,and $45,000.What is Jane's economic profit from running her own business?

A)$-65,000
B)$5,000
C)$10,000
D)$20,000

Question 46

Figure 13-2
The figure below depicts a total cost function for a firm that produces cookies.

Refer to Figure 13-2.Which of the following is true of the production function (not pictured)that underlies this total cost function? (i) Total output increases as the quantity of inputs increases,but at a decreasing rate.
(ii) Marginal product is diminishing for all levels of input usage.
(iii) The slope of the production function decreases as the quantity of inputs increases.

A)(i) only
B)(ii) and (iii)
C)(i) and (iii)
D)All of the above are correct.

Question 47

Total revenue minus explicit and implicit costs is called

A)accounting profit
B)economic profit
C)average total cost
D)fixed expenses

Question 48

Figure 13-1
The figure below depicts a production function for a firm that produces cookies.

Refer to Figure 13-1.With regard to cookie production,the figure implies

A)diminishing marginal product of workers.
B)diminishing marginal cost of cookie production.
C)decreasing cost of cookie production.
D)increasing marginal product of workers.

Question 49

Kevin quit his $65,000 a year corporate lawyer job to open up his own law practice.In Kevin's first year in business his total revenue equaled $150,000.Kevin's explicit cost during the year totaled $85,000.Using the information from Kevin's first year in business,what is his economic profit?

A)$0
B)$20,000
C)$65,000
D)$85,000

Question 50

Which of the following is an implicit cost?

A)Salaries paid to owners who work for the firm
B)Interest on money borrowed to finance equipment purchases
C)Cash payments for raw materials
D)Foregone rent on office space owned and used by the firm

Question 51

The value of a business owner's time is an example of

A)an opportunity cost.
B)a fixed cost.
C)an explicit cost.
D)total revenue.

Question 52

Suppose that for a particular business there are no implicit opportunity costs.Then

A)accounting profit will be greater than economic profit.
B)accounting profit will be the same as economic profit.
C)accounting profit will be less than economic profit.
D)the relationship between accounting profit and economic profit cannot be determined since the amount of explicit opportunity costs is not given.

Question 53

Figure 13-2
The figure below depicts a total cost function for a firm that produces cookies.

Refer to Figure 13-2.The changing slope of the total cost curve reflects

A)decreasing average variable cost.
B)decreasing average total cost.
C)decreasing marginal product.
D)increasing fixed cost.

Question 54

The marginal product of labor is equal to the

A)incremental cost associated with a one unit increase in labor.
B)incremental profit associated with a one unit increase in labor.
C)increase in labor necessary to generate a one unit increase in output.
D)increase in output obtained from a one unit increase in labor.

Question 55

John has decided to start his own lawn-mowing business.To purchase the mowers and the trailer to transport the mowers,John withdrew $1,000 from his savings account,which was earning 3% interest,and borrowed an additional $2,000 from the bank at an interest rate of 7%.What is John's annual opportunity cost of the financial capital that has been invested in the business?

A)$30.00
B)$140.00
C)$170.00
D)$3,000.00

Question 56

Economists assume that the goal of the firm is to maximize

A)total revenue.
B)total profits.
C)total costs.
D)total satisfaction.

Question 57

The marginal product of labor can be defined as

A)change in profit/change in labor.
B)change in output/change in labor.
C)change in labor/change in output.
D)change in labor/change in total cost.

Question 58

Which of the following statements about a production function is correct for a firm that uses labor to produce output?

A)The production function depicts the relationship between the quantity of labor and the quantity of output.
B)The slope of the production function measures marginal cost.
C)The quantity of output determines the maximum amount of labor the firm will hire.
D)All of the above are correct.

Question 59

When adding another unit of labor leads to an increase in output that is smaller than the increases in output that resulted from adding previous units of labor,we have the property of

A)diminishing labor.
B)diminishing output.
C)diminishing marginal product.
D)negative marginal product.

Question 60

Figure 13-2
The figure below depicts a total cost function for a firm that produces cookies.

Refer to Figure 13-2.Which of the following statements best captures the nature of the underlying production function?

A)Output increases at a decreasing rate with additional units of input.
B)Output increases at an increasing rate with additional units of input.
C)Output decreases at a decreasing rate with additional units of input.
D)Output decreases at an increasing rate with additional units of input.

Question 61

Table 13-3

Refer to Table 13-3.Each worker at Gallo's cork factory costs $12 per hour.The cost of each machine is $20 per day regardless of the number of corks produced.Assume the number of machines does not change.If Gallo's produces at a rate of 78 corks per hour,what is the total machine cost per day?

A)$20
B)$40
C)$72
D)$320

Question 62

Figure 13-2
The figure below depicts a total cost function for a firm that produces cookies.

Refer to Figure 13-2.Which of the statements below is most consistent with the shape of the total cost curve?

A)Producing an additional cookie is always more costly than producing the previous cookie.
B)Total production of cookies decreases with additional units of input.
C)Producing additional cookies is equally costly, regardless of how many cookies are already being produced.
D)Producing additional cookies becomes increasingly costly only when the number of cookies already being produced is large.

Question 63

Table 13-2

Refer to Table 13-2.What is the marginal product of the fourth worker?

A)65
B)70
C)75
D)80

Question 64

Table 13-1

Refer to Table 13-1.What is total output when 4 workers are hired?

A)30
B)40
C)120
D)160

Question 65

For a firm,the relationship between the quantity of inputs and quantity of output is called the

A)profit function.
B)production function.
C)total-cost function.
D)quantity function.

Question 66

The marginal product of an input in the production process is the increase in

A)total revenue obtained from an additional unit of that input.
B)profit obtained from an additional unit of that input.
C)total revenue obtained from an additional unit of that input.
D)quantity of output obtained from an additional unit of that input.

Question 67

For a firm,the production function represents the relationship between

A)implicit costs and explicit costs.
B)quantity of inputs and total cost.
C)quantity of inputs and quantity of output.
D)quantity of output and total cost.

Question 68

The marginal product of any input

A)is the increase in total cost associated with a one-unit increase in production.
B)is the change in total output associated with a $1.00 increase in total cost.
C)is the increase in total cost resulting from the hiring of an additional worker.
D)is the increase in total output obtained from one additional unit of that input.

Question 69

A total-cost curve shows the relationship between the

A)quantity of an input used and the total cost of production.
B)quantity of output produced and the total cost of production.
C)total cost of production and profit.
D)total cost of production and total revenue.

Question 70

Table 13-3

Refer to Table 13-3.Each worker at Gallo's cork factory costs $12 per hour.The cost of each machine is $20 per day regardless of the number of corks produced.What is the total daily cost of producing at a rate of 55 units per hour if Gallo's operates 8 hours per day?

A)$480
B)$576
C)$520
D)$616

Question 71

When a firm's only variable input is labor,then the slope of the production function measures the

A)quantity of labor.
B)quantity of output.
C)total cost.
D)marginal product of labor.

Question 72

The total cost curve gets steeper as output increases due to

A)diseconomies of scale.
B)economies of scale.
C)diminishing marginal product.
D)increasing returns to scale.

Question 73

On a 100-acre farm,a farmer is able to produce 3,000 bushels of wheat when he hires 2 workers.He is able to produce 4,400 bushels of wheat when he hires 3 workers.Which of the following possibilities is consistent with the property of diminishing marginal product?

A)The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers.
B)The farmer is able to produce 5,800 bushels of wheat when he hires 4 workers.
C)The farmer is able to produce 6,000 bushels of wheat when he hires 4 workers.
D)All of the above are correct.

Question 74

Table 13-3

Refer to Table 13-3.Each worker at Gallo's cork factory costs $12 per hour.The cost of each machine is $20 per day regardless of the number of corks produced.If Gallo's produces at a rate of 70 corks per hour and operates 8 hours per day,what is Gallo's total labor cost per day?

A)$72
B)$96
C)$480
D)$576

Question 75

Assume a certain firm regards the number of workers it employs as variable,and that it regards the size of its factory as fixed.This assumption is often realistic

A)in the short run, but not in the long run.
B)in the long run, but not in the short run.
C)both in the short run and in the long run.
D)neither in the short run nor in the long run.

Question 76

Table 13-2

Refer to Table 13-2.At which number of workers does diminishing marginal product begin?

A)2
B)3
C)4
D)5

Question 77

Suppose a certain firm is able to produce 165 units of output per day when 15 workers are hired.The firm is able to produce 176 units of output per day when 16 workers are hired (holding other inputs fixed).Then the marginal product of the 16th worker is

A)10 units of output.
B)11 units of output.
C)16 units of output.
D)176 units of output.

Question 78

When the marginal product of an input declines as the quantity of that input increases,the production function exhibits

A)increasing returns to scale.
B)decreasing returns to scale.
C)diminishing total product.
D)diminishing marginal product.

Question 79

Which of these assumptions is often realistic for a firm in the short run?

A)The firm can vary both the size of its factory and the number of workers it employs.
B)The firm can vary the size of its factory, but not the number of workers it employs.
C)The firm can vary the number of workers it employs, but not the size of its factory.
D)The firm can vary neither the size of its factory nor the number of workers it employs.

Question 80

Let L represent the number of workers hired by a firm and let Q represent that firm's quantity of output.Assume two points on the firm's production function are (L = 12,Q = 122)and (L = 13,Q = 132).Then the marginal product of the 13th worker is

A)8 units of output.
B)10 units of output.
C)122 units of output.
D)132 units of output.