Deck 21: Acosts and the Supply of Goods

Question 1

If the CEO of a large corporation uses the corporate jet to fly friends to the Super Bowl at company expense,this is most clearly an example of

A)the duality problem.
B)the violation of ceteris paribus conditions.
C)a negative externality.
D)the principal-agent problem.

Answer 1

D

Question 2

The short-run average total cost (ATC)curve of a firm will tend to be U-shaped because

A)larger firms always have lower per-unit costs than smaller firms.
B)at low levels of output,AFC will be high,while at high levels of output,MC will be high as the result of diminishing returns.
C)diminishing returns will be present when output is small,and high AFC will push per-unit cost to high levels when output is large.
D)diseconomies of scale will be present at both small and large output rates.

Answer 2

B

Question 3

A downward-sloping portion of a long-run average total cost curve is the result of

A)economies of scale.
B)diseconomies of scale.
C)diminishing returns.
D)the existence of fixed resources.

Answer 3

A

Question 4

An activity known as shirking is least likely to occur when

A)workers are not monitored.
B)all workers are paid the same wage rate.
C)the earnings of workers are closely tied to the worker's output.
D)the firm is organized as a corporation.

Question 5

A business owned by a single individual who is fully liable for its debts is called

A)a corporation.
B)a proprietorship.
C)a partnership.
D)an agency.

Question 6

The owners of a business

A)are paid the market rate of return for resources they supply to the firm.
B)are residual income claimants.
C)have little incentive to monitor shirking on the part of employees.
D)have little incentive to provide their employees with an incentive system that encourages operational efficiency.

Question 7

Which of the following would shift a firm's short-run cost curves downward?

A)an advance in technology
B)an increase in employees' wages
C)an increase in the demand for the firm's product
D)an increase in excise taxes levied on the firm's product

Question 8

One advantage of team production over contracting out is that

A)the cost of negotiating and enforcing contracts is generally lower with team production than with contracting out.
B)the principal agent problem is eliminated by team production but cannot be addressed in contracting out.
C)costs are always lower with team production because of the elimination of transactions costs.
D)efficiency is always greater with team production.

Question 9

Which of the following explains most clearly why business owners have a strong incentive to strive for operational efficiency?

A)They recognize that operational efficiency promotes the public interest.
B)As residual claimants,owners will receive a higher income from increased efficiency.
C)The owners will be able to keep production costs low by providing free managerial services to the firm.
D)The owners will be able to gain by paying employees below market wages,which will improve the overall efficiency of the economy.

Question 10

If high-level executives of a company award themselves sizable bonuses even though the firm they manage is making losses and performing poorly,this event is most likely to arise because of

A)the law of diminishing marginal returns.
B)competition among business firms for high-level executives.
C)economies of scale.
D)the principal-agent problem.

Question 11

Automobile companies typically make some of the parts for cars (for example,the body and engine)but not others (for example,the tires).Under what conditions would you expect an automobile manufacturer to be most likely to buy inputs from other companies?

A)when the specifications (size,style,etc. )of the inputs change frequently
B)when the inputs being produced have little value
C)when market prices have not been established for the inputs
D)when it is relatively easy to measure the quantity and quality of the input

Question 12

Which of the following is most likely to be an implicit cost of production?

A)property taxes on a building owned by the firm
B)transportation costs paid to a trucking supplier
C)rental payments for a building utilized by the company and rented from another party
D)interest income foregone on funds invested in the firm by the owners

Question 13

Since it is costly for stockholders to monitor corporate managers,managers may be able to achieve personal perks and pursue other policies that conflict with profit maximization.This is an example of

A)an external benefit.
B)economies of scale.
C)the principal-agent problem.
D)sunk costs.

Question 14

A foreign exchange student bought a used car for $10,000 and resold it one year later for $6,500.Insurance,license,and operating costs for the year were $1,500.What was his economic cost of owning and operating the car for the year if the market rate of interest was 10 percent?

A)$3,500
B)$5,000
C)$6,000
D)$8,500

Question 15

In the short run,if average variable cost equals $50,average total cost equals $75,and output equals 100,the total fixed cost must be

A)$25.
B)$2,500.
C)$5,000.
D)$7,500.

Question 16

Which of the following represents a long-run adjustment?

A)the hiring of four additional cashiers by a supermarket
B)a cutback on purchases of coke and iron ore by a steel manufacturer
C)construction of a new assembly-line plant by a car manufacturer
D)the extra dose of fertilizer used by a farmer on his wheat crop

Question 17

A disadvantage of team production compared to contracting out is that

A)transaction costs are often higher with team production.
B)the level of specialized knowledge required by team production is greater than with contracting out.
C)the problem of shirking must be more carefully addressed with team production.
D)team production increases the cost of production in most situations.

Question 18

When costs that vary with the level of output are divided by the output,you have calculated

A)total changing cost.
B)total fixed cost.
C)average fixed cost.
D)average variable cost.

Question 19

The law of diminishing returns

A)explains why marginal cost eventually increases as output expands.
B)implies that average fixed cost will remain unchanged as output expands.
C)is true for physical production activities but not for activities such as studying.
D)applies to a capitalist economy but would be irrelevant if the means of production were owned by the state.

Question 20

Approximately three-fourths of all U.S.firms are

A)corporations.
B)proprietorships.
C)partnerships.
D)consumer cooperatives.

Question 21

Which of the following provides the strongest evidence that the corporate form of business structure is relatively cost efficient in many industries?

A)the ability of the corporate business structure to compete effectively in most industries with other forms of business structure
B)the fact that nearly three of every four businesses in the United States is an individual proprietorship
C)the fact that economic theory indicates corporate managers have some leeway to pursue their own interests at the expense of greedy capitalists
D)the ability of some corporate managers to achieve high salaries even though the firms they are directing are not earning economic profit

Question 22

The sum of the explicit and implicit costs incurred in the production process is called

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

Question 23

The implicit rate of return that must be paid to induce investors to continue to supply the funds necessary to maintain a firm's capital assets is called

A)the investors' rate of return.
B)the opportunity cost of labor.
C)the opportunity cost of capital.
D)equity capital.

Question 24

Takeover bids (and the potential for such bids)

A)increase the incentive of corporate managers to perform efficiently.
B)increase the likelihood that managers will be able to gain at the expense of stockholders.
C)are more likely to occur when a company is producing efficiently and operating profitably.
D)serve no useful economic purpose.

Question 25

When total revenue minus total economic cost is equal to zero,the firm is

A)earning above-average economic profit.
B)earning the normal profit rate.
C)losing too much money to stay in business.
D)earning abnormally low profits.

Question 26

The costs of a firm indicate the desire of consumers for

A)the product produced by the firm.
B)other goods that might have been produced with the same resources.
C)goods that can be easily substituted for the good produced by the firm.
D)goods that are complementary with the good produced by the firm.

Question 27

Which of the following provides the strongest evidence that the corporate form of business structure is relatively efficient,particularly when business firms are large?

A)the fact that almost 90 percent of business revenues are generated by corporations
B)the fact that individual proprietorships are more numerous than corporations
C)the fact that economic theory indicates corporate managers have some leeway to pursue their own interests at the expense of the owners of the firm
D)the high salaries of many corporate executives,including some managing firms that are making economic losses

Question 28

Profit-sharing plans,where employees receive bonuses in proportion to the company's profits,

A)reduce the principal-agent problem.
B)are intended to reduce the number of employees who are residual claimants.
C)eliminate shirking problems.
D)are essentially gifts to employees and do not generate any benefit for the firm's owners.

Question 29

The most important implicit cost generally omitted from the accounting statement of a firm is the

A)rental cost of machinery.
B)cost of compliance with government regulations.
C)opportunity cost of the equity capital invested by the owners.
D)accounting cost incurred as the result of tax compliance.

Question 30

Accounting costs are often unsatisfactory from the economist's point of view because

A)they fail to allow for depreciation,the wearing out of capital assets during a period.
B)they often exclude the opportunity costs of the firm's equity capital.
C)accountants attempt to minimize costs in order to make profits look good.
D)accounting procedures are designed to overstate costs in order to minimize business tax liability.

Question 31

The opportunity costs associated with the use of resources owned by a firm are usually

A)externalities.
B)implicit costs.
C)explicit costs.
D)sunk costs.

Question 32

Which of the following is a difference between corporations and partnerships?

A)Partnerships are subject to double taxation;corporations are not.
B)With partnerships,ownership rights are divisible and easily transferable;this is not true for corporations.
C)Corporate owners face limited liability;owners of partnerships do not.
D)Corporations always have more owners than partnerships.

Question 33

Which of the following items is most likely to be an implicit cost of production?

A)the "competitive rate" salary the owner of the business pays herself for services provided
B)property taxes on a building owned by the firm
C)rental payments for a building utilized by the company and rented from another party
D)the interest income foregone on the equity capital invested by owners

Question 34

Which of the following is most likely to be an implicit cost of production?

A)the "competitive rate" salary the owner of the business pays herself for services provided
B)the property taxes on a building owned by the firm
C)the rental income foregone because the business owns its building
D)the interest paid on outstanding loans of the business

Question 35

When total revenue minus total economic cost is greater than zero,the firm is

A)earning higher than normal profits.
B)earning the normal profit rate.
C)making economic losses.
D)earning economic profit but accounting losses.

Question 36

Which of the following is most likely to reduce the incidence of employee shirking?

A)use of the corporate business structure,rather than an individual proprietorship
B)closely relating the pay of workers to their productive contribution
C)payment of identical wage rates to all workers
D)providing workers with a year-end bonus if the business firm loses money during the year

Question 37

Normal profit is a term for

A)explicit profit.
B)the competitive rate of return.
C)the accounting profit forgone.
D)pure economic profit.

Question 38

Which of the following is not an advantage of the corporate structure over proprietorship and partnership forms of business organization?

A)Stockholders in the corporation have limited liability,whereas proprietors or partners have unlimited liability.
B)Ownership rights of a corporation may be transferred more easily.
C)Large investment funds are more easily attracted by the corporation.
D)Corporations are less likely to suffer from the principal-agent problem.

Question 39

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

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

Question 40

Which of the following is characteristic of the corporate form of ownership?

A)unlimited liability
B)easy transferability of ownership rights
C)no divisible ownership rights
D)absence of the principal-agent problem

Question 41

If variable cost at each output level doubles,

A)ATC doubles.
B)AFC doubles.
C)MC remains unchanged.
D)MC doubles.
E)MC less than doubles.

Question 42

Interest foregone on financial capital invested in a firm represents an economic cost

A)only if the firm borrows to finance capital investments.
B)only when the funds are used to buy machinery.
C)because funds invested in the firm could be earning interest elsewhere.
D)because accountants have traditionally input an interest cost for this item.

Question 43

The difference between a firm's total revenues and total costs when all explicit and implicit costs are included is the firm's

A)economic profit.
B)accounting profit.
C)opportunity cost of capital.
D)long-run average total cost.

Question 44

For most firms,the major difference between accounting profit and economic profit is that

A)explicit and implicit costs are included in the accounting profit while only explicit costs are included in economic profit.
B)accounting profit omits the salaries of managers,and therefore,it is generally greater than economic profit.
C)accounting profit is based on opportunity cost,whereas economic profit is based on market transactions.
D)accounting profit does not consider the opportunity cost of the firm's equity capital and,therefore,generally overstates economic profit.

Question 45

The difference between zero accounting profit and zero economic profit is that

A)economists include opportunity cost in zero economic profit,while accountants do not include opportunity cost in zero accounting profit.
B)economists do not include opportunity cost in zero economic profit,while accountants do include opportunity cost in zero accounting profit.
C)economists include opportunity cost in zero accounting profit,while accountants do not include opportunity cost in zero economic profit.
D)economists do not include opportunity cost in zero accounting profit,while accountants do include opportunity cost in zero economic profit.

Question 46

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

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

Question 47

Anne Teek works full time as the manager of her used furniture store in which she has invested $40,000.Last year,her total revenues were $90,000 and her costs were $60,000 for merchandise,gas,electricity,and other explicit-cost items.Ms.Teek pays herself a "competitive" salary of $30,000 per year.An economist would consider her profits for the year to be

A)-$40,000.
B)$0.
C)$0 minus the opportunity cost of the $40,000 of capital invested in the store.
D)$30,000.

Question 48

If most businesses in an industry are earning a 13 percent rate of return on their assets,but your firm is earning 23 percent,your rate of economic profit is

A)zero.
B)10 percent.
C)23 percent.
D)36 percent.

Question 49

Ben quit his job as an economics professor to become a golf professional.He gave up his $30,000 salary and invested his retirement fund of $50,000 (which was earning 10 percent interest)in this venture.After all expenses,his net winnings were $35,000.Ben's economic profits were

A)$35,000.
B)$5,000.
C)$2,000.
D)zero.

Question 50

When an economist says a firm is earning zero economic profit,this implies that the firm

A)will be forced out of business in the near future unless market conditions change.
B)is earning a zero rate of return on its assets.
C)is earning as high a rate of return now as could be earned in other industries.
D)has an accounting profit of zero.

Question 51

Economic profit is

A)total revenues minus variable costs.
B)total revenues minus private costs.
C)total revenues minus explicit costs.
D)total revenues minus total costs.

Question 52

The rate of return that owners of capital must receive in order to induce them to continue supplying the capital is often referred to as

A)accounting profit.
B)the normal or market rate of return.
C)economic profit.
D)the accounting rate of return.

Question 53

Sally leaves her $34,000 secretarial position and invests her savings of $15,000 (on which she was earning 6 percent interest)to start her own agency.After expenses,her net income was $38,900.Her economic profit was

A)$4,900.
B)$4,000.
C)$38,900.
D)zero.
E)-$10,100

Question 54

During the short-run period of the production process,a firm will be

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

Question 55

The long run is a period of

A)at least one year.
B)sufficient length to allow a firm to expand output by hiring additional workers.
C)sufficient length to allow a firm to alter its plant size and capacity and all other factors of production.
D)sufficient length to allow a firm to transform economic losses into economic profits by hiring better workers.

Question 56

The normal rate of return on equity capital is also known as

A)the explicit cost of capital.
B)the marginal cost of capital.
C)economic profit.
D)the opportunity cost of capital.

Question 57

The short run is a time period such that

A)the existing firms in the market do not have sufficient time to change the amounts of any of the inputs that they employ.
B)the existing firms in the market do not have sufficient time to either increase or decrease their current rate of output.
C)the existing firms in the market do not have sufficient time to increase the size of their existing plant or build a new factory.
D)new firms may build plants and enter the industry.

Question 58

If fixed cost at quantity (Q)= 100 is $130,then

A)fixed cost at Q = 0 is $0.
B)fixed cost at Q = 0 is less than $130.
C)fixed cost at Q = 200 is $260.
D)fixed cost at Q = 200 is $130.
E)it is impossible to calculate fixed costs at any other quantity.

Question 59

The short run is the time period during which

A)all of the firm's costs are fixed.
B)the value of the firm's assets starts to decay.
C)the firm can adjust all inputs freely.
D)some of the firm's input decisions are constrained by previous commitments.

Question 60

Which of the following is most likely to be true of economic and accounting profits?

A)Economic profits are less than accounting profits.
B)Accounting profits are less than economic profits.
C)Economic profits plus accounting profits equal zero.
D)Accounting profits minus economic profits equal zero.

Question 61

Use the table below to answer the following question.

What is the average total cost at an output level of four units?

A)$1,200
B)$1,400
C)$1,500
D)$2,000

Question 62

Use the table below to answer the following question.

What is the marginal cost of producing the third unit of output?

A)$22
B)$23.33
C)$73.33
D)This cannot be determined from the data.

Question 63

A fruit packing plant usually shuts down for three months each year.During that period,its

A)fixed costs are greater than zero.
B)variable costs are greater than zero.
C)total costs are zero.
D)fixed costs are zero.

Question 64

Fixed costs are best defined as

A)costs that do not vary with output.
B)costs that are at a minimum when output approaches the firm's capacity.
C)the amount that one more unit of output adds to total costs.
D)costs that decline as output increases.

Question 65

The marginal cost of a good is

A)lower for competitive firms than for monopolists.
B)the cost of an additional unit.
C)equal to fixed cost at high output levels.
D)equal to variable cost when the firm is maximizing profit.

Question 66

If average fixed costs equal $60 and average total costs equal $120 when output is 100,the total variable cost must be

A)$40.
B)$60.
C)$6,000.
D)$8,000.

Question 67

The average fixed costs of a firm equal

A)implicit costs divided by output.
B)explicit costs divided by output.
C)total cost minus variable cost.
D)(total cost minus variable cost)divided by output.

Question 68

Use the table below to answer the following question.

What is the marginal cost of producing the third unit of output?

A)$20
B)$44
C)$70
D)This cannot be determined from the data.

Question 69

Costs that a firm remaining in business will still incur even if it halts current production are called

A)fixed costs.
B)variable costs.
C)implicit costs.
D)explicit costs.

Question 70

The table below presents the schedule of total costs for Sharpie's Pencil Company.

Beyond 110,000 units,the per-unit marginal cost of producing an additional 10,000 pencils is

A)5 cents.
B)5.5 cents.
C)6 cents.
D)7 cents.

Question 71

Marginal cost is best defined as

A)a cost that does not vary with the rate of output.
B)the difference between fixed and variable cost at any level of output.
C)the amount added to total cost when one more unit of output is produced.
D)the difference between price and average total cost at the profit-maximizing level of output.

Question 72

Use the table below to answer the following question.

Average total cost is at a minimum when the output level is

A)three units.
B)four units.
C)five units.
D)six units.

Question 73

If fixed costs are $200,000 and variable costs are $30 per unit over the relevant range of output,when 10,000 units are produced,the average total cost will be

A)$20.
B)$30.
C)$50.
D)$70.

Question 74

Mr.Hudson notes that if he produces 10 pairs of shoes per day,his average fixed cost (AFC)is $14 and his marginal cost is $8;if he produces 20 pairs of shoes per day,his MC is $15.What is his AFC when output is 20 pairs of shoes per day?

A)$5
B)$7
C)$8
D)$15

Question 75

If a firm produces nothing,which of the following costs will be zero?

A)total cost
B)fixed cost
C)opportunity cost
D)variable cost

Question 76

Average fixed costs

A)will remain unchanged as output expands.
B)are defined as the change in total costs divided by the change in output.
C)will always increase as output increases.
D)will always decrease as output expands.

Question 77

Which of the following will become smaller and smaller as the firm expands output?

A)average total cost
B)average fixed cost
C)marginal cost
D)total fixed cost

Question 78

The minimum points of the average variable cost and average total cost curves occur where

A)the marginal cost curve lies below the average variable cost and average total cost curves.
B)the marginal cost curve intersects those curves.
C)the average variable cost and average total cost curves intersect.
D)the slope of total cost is the smallest.

Question 79

Which of the following is true?

A)The difference between the ATC and AVC curves will decline as output expands.
B)The AFC will remain constant as output increases.
C)If ATC is increasing,then AVC must be greater than ATC.
D)Implicit costs and fixed costs are always the same.

Question 80

For a firm that wants to remain in business,which of the following costs could be avoided if it halted current production?

A)fixed costs
B)variable costs
C)sunk costs
D)implicit costs