Deck 13: The Costs of Production

Question 1

John owns a shoe-shine business.Which cost does his accountant most likely include 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 shares and bought a shoe-shine booth
C)the cost of shoe polish
D)wages John could have earned for unclaimed overtime labour hours

Answer 1

the cost of shoe polish

Question 2

XYZ Corporation produced 300 units of output but sold only 250 of the units it produced.The average cost of production for each unit of output produced was $100.Each of the 250 units sold was sold for a price of $95.What would total revenue for XYZ Corporation be

A)-$3875
B)$3875
C)$23,750
D)$25,500

Answer 2

$23,750

Question 3

What would be an example of an implicit cost of production

A)the cost of lost income a student could have earned had they not gone to university
B)the cost of raw materials for producing bread in a bakery
C)the cost of a delivery truck in a business that rarely makes deliveries
D)the cost of employee training programs

Answer 3

the cost of lost income a student could have earned had they not gone to university

Question 4

Scenario 13-2
Joe wants to start his own business.The business he wants to start will require that he purchase a factory that costs $500,000.To finance this purchase, he will use $200,000 of his own money, on which he has been earning 10 percent interest per year.In addition, he will borrow $300,000, and he will pay 12 percent interest per year on that loan.
Refer to Scenario 13-2.For the first year of operation,what is the explicit cost of purchasing the factory

A)$12,000
B)$20,000
C)$36,000
D)$44,000

Question 5

What does industrial organization study

A)how labour unions organize workers in industries
B)how profitable firms are in organized industries
C)how industries organize for political advantage
D)how firms make decisions depending on different market conditions

Question 6

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 7

What does total revenue equal

A)Total output x Price per unit of output
B)(Total output x Sales price) - Inventory shortage
C)(Total output x Sales price) - Inventory surplus
D)Total profit - Total cost

Question 8

What are accountants primarily interested in

A)the flow of money into and out of firms
B)the stock of assets of firms
C)the marginal costs of production of firms
D)the taxes due on capital assets of firms

Question 9

Which cost would be regarded as an implicit cost

A)the cost of accounting services
B)the opportunity cost of financial capital that has been invested in the business
C)the cost of compliance with government regulation
D)all costs that involve outlays of money by the firm

Question 10

Which term refers to the amount of money that a firm pays to buy inputs

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

Question 11

What would be an example of an explicit cost of production

A)the cost of forgone labour earnings for an entrepreneur
B)the cost of the lost opportunity to invest in other capital markets when the money is invested in one's business
C)the cost of gas for a long haul truck driver
D)the cost of training programs postponed indefinitely

Question 12

XYZ Corporation produced 300 units of output but sold only 255 of the units it produced.The average cost of production for each unit of output produced was $100.Each of the 255 units sold was sold for a price of $100.What would total revenue for XYZ Corporation be

A)-$2700
B)$2700
C)$21,125
D)$25,500

Question 13

Which statement best describes the relationship of price and quantity supplied based on the law of supply

A)Firms' production levels are not correlated with the price of a good.
B)The supply curve slopes downward.
C)Firms are willing to produce a greater quantity of a good when the price of the good is higher.
D)As price increases, producers have more market power than consumers.

Question 14

What is the term for the amount of money that a wheat farmer could have earned if he had planted barley instead of wheat

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

Question 15

How are explicit costs calculated

A)They require an outlay of money by the firm.
B)They include all of the firm's opportunity costs.
C)They include income that is forgone by the firm's owners.
D)They include interest earned from abandoned investment opportunities.

Question 16

What is the term for things that must be forgone to acquire a good

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

Question 17

To an economist,which question is answered in the field of industrial organization

A)Why are consumers subject to the law of demand?
B)Why do firms experience falling marginal product of labour?
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 18

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,how is the $25,000 income that she gave up counted in terms of the catering business

A)direct costs
B)opportunity costs
C)explicit costs
D)sunk costs

Question 19

Which term refers to the amount of money that a firm receives from the sale of its output

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

Question 20

What is added to profit to obtain total revenue

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

Question 21

What is the relationship between accounting profit and economic profit

A)Accounting profit = Economic profit + Implicit costs
B)Accounting profit = Economic profit - Implicit costs
C)Economic profit = Accounting profit + Explicit costs
D)Economic profit = Accounting profit - Explicit costs

Question 22

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

Refer to Figure 13-1.As the number of workers increases,what happens to the firm's production

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 increases, at an increasing rate

Question 23

What is the marginal product of labour equal to

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

Question 24

What do a firm's opportunity costs of production amount to

A)explicit costs only
B)implicit costs only
C)explicit costs and implicit costs combined
D)explicit costs, implicit costs, and total revenue combined

Question 25

What is the relationship between economic profit and accounting profit

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

Question 26

What is accounting profit 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 27

What can the marginal product of labour be defined as

A)change in profit divided by change in quantity of labour
B)change in quantity of output divided by change in quantity of labour
C)change in quantity of labour divided by change in quantity of output
D)change in quantity of labour divided by change in profit

Question 28

Suppose adding another unit of labour leads to a smaller increase in output than previous units of labour provided.What property does this suggest

A)diminishing labour
B)negative marginal labour
C)diminishing marginal product
D)negative marginal product

Question 29

Dolores used to work as a high school teacher for $55,000 per year but quit in order to start her own catering business.To buy the necessary equipment,she withdrew $30,000 from her savings (which paid 2 percent interest per year) and borrowed $30,000 from her uncle,to whom she pays 3 percent interest per year.Last year she paid $25,000 for ingredients and had revenue of $75,000.She asked Louis,an accountant,and Greg,an economist,to calculate her profit for her.What did they say

A)Louis said her profit was $49,100, and Greg said she lost $6500.
B)Louis said her profit was $49,100, and Greg said her profit was $6500.
C)Louis said her profit was $50,000, and Greg said she lost $5000.
D)Louis said her profit was $4500, and Greg said her profit was $33,500.

Question 30

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

Refer to Figure 13-1.With regard to cookie production,what does the figure imply

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

Question 31

Scenario 13-3
Zach took $500,000 out of the bank and used it to start his new cookie business.The bank account pays 4 percent interest per year.During the first year of his business, Zach sold 15,000 boxes of cookies for $3 per box.Also, during the first year, the cookie business incurred costs that required outlays of money amounting to $14,000.
Refer to Scenario 13-3.What was Zach's economic profit for the year

A)-$455,000
B)-$6000
C)$11,000
D)$31,000

Question 32

Scenario 13-2
Joe wants to start his own business.The business he wants to start will require that he purchase a factory that costs $500,000.To finance this purchase, he will use $200,000 of his own money, on which he has been earning 10 percent interest per year.In addition, he will borrow $300,000, and he will pay 12 percent interest per year on that loan.
Refer to Scenario 13-2.For the first year of operation,what is the opportunity cost of purchasing the factory

A)$10,000
B)$20,000
C)$34,000
D)$56,000

Question 33

What is the equation for accounting profit

A)Total revenue - Total costs
B)Economic profit + Implicit costs
C)Total revenue - (Implicit costs + Total revenue) - Opportunity costs
D)Accounting revenue - Opportunity costs

Question 34

What is economic profit equal to

A)explicit revenue minus the explicit cost of producing goods and services
B)total revenue minus the opportunity cost of producing goods and services
C)accounting revenue minus the accounting cost of producing goods and services
D)total revenue minus the explicit cost of producing goods and services

Question 35

A certain firm manufactures and sells computer chips.Suppose that last year it sold 4 million chips at a price of $10 per chip.Which of the following terminology correctly accounts for the $40 million to this firm

A)Its accounting profit amounted to $40 million.
B)Its economic profit amounted to $40 million.
C)Its total revenue amounted to $40 million.
D)Its explicit costs amounted to $40 million.

Question 36

What relationship does a production function measure

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

Question 37

When would one expect to observe diminishing marginal product of labour

A)when crowded factory space reduces the productivity of new workers
B)when workers are discouraged about the lack of help from other workers
C)when only new workers are trained in using the most productive capital
D)when union workers are told to reduce their work effort in preparation for a new round of collective bargaining talks

Question 38

Which statement describes a short-run production function

A)The production function depicts the relationship between the quantity of labour and the quantity of output.
B)The slope of the production function measures marginal cost.
C)The quantity of output is measured along the horizontal axis.
D)Marginal product is always constant.

Question 39

Which of the following does NOT calculate accounting profit or economic profit properly

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

Question 40

Scenario 13-3
Zach took $500,000 out of the bank and used it to start his new cookie business.The bank account pays 4 percent interest per year.During the first year of his business, Zach sold 15,000 boxes of cookies for $3 per box.Also, during the first year, the cookie business incurred costs that required outlays of money amounting to $14,000.
Refer to Scenario 13-3.What was Zach's accounting profit for the year

A)-$455,000
B)-$56,000
C)$1000
D)$31,000

Question 41

For a firm,what does the production function represent

A)the relationship between implicit costs and explicit costs
B)the relationship between quantity of inputs and total cost
C)the relationship between quantity of inputs and quantity of output
D)the relationship between quantity of output and total cost

Question 42

Which assumption 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 43

What is the marginal product of an input in the production process

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

Question 44

What is the cost of producing the typical unit of output

A)the firm's average total cost
B)the firm's opportunity cost
C)the firm's average variable cost
D)the firm's marginal cost

Question 45

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

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

Question 46

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

Refer to Figure 13-2.What is the relationship between input and output of a 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 47

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

Refer to Figure 13-2.What does the changing slope of the total-cost curve reflect

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

Question 48

Suppose a certain firm is able to produce 160 units of output per day when 15 workers are hired.The firm is able to produce 178 units of output per day when 16 workers are hired (holding other inputs fixed).What is the marginal product of the 16th worker

A)10 units of output
B)11 units of output
C)18 units of output
D)176 units of output

Question 49

For a certain firm,the number of workers hired is the only variable input.When this firm's production function is illustrated on a graph,what is measured on the axes

A)The number of workers is measured on the horizontal axis, and the quantity of output is measured on the vertical axis.
B)The number of workers is measured on the horizontal axis, and variable cost is measured on the vertical axis.
C)The number of workers is measured on the horizontal axis, and profit is measured on the vertical axis.
D)The number of workers is measured on the horizontal axis, and total cost is measured on the vertical axis.

Question 50

What does a total-cost curve show

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

Question 51

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 52

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).What is the marginal product of the 13th worker

A)8 units of output
B)10 units of output
C)122 units of output
D)130 units of output

Question 53

When a firm's only variable input is labour,what does the slope of the production function measure

A)the quantity of labour
B)the quantity of output
C)the total cost
D)the marginal product of labour

Question 54

On a 100-acre farm,a farmer is able to produce 3000 bushels of wheat when he hires two workers.He is able to produce 4400 bushels of wheat when he hires three workers.How many bushels of wheat could the farmer produce when he hires four workers

A)5600
B)5800
C)6000
D)7400

Question 55

What do we know about fixed costs

A)They vary inversely with production.
B)They vary in proportion with production.
C)They are incurred only when production is at capacity.
D)They are incurred even if nothing is produced.

Question 56

Assume a certain firm regards the number of workers it employs as variable.When is this variable assumption often realistic

A)If the size of its factory is fixed, then it refers to the short run.
B)If the size of its factory is fixed, then it refers to the long run.
C)If the size of its factory is not fixed, then it refers to the short run.
D)If the size of its factory is not fixed, then it refers to the short run and the long run.

Question 57

What distinguishes short-run cost analysis from long-run cost analysis for a profit-maximizing firm

A)In the short run output is not variable.
B)In the short run the number of workers used to produce the firm's product is fixed.
C)In the short run the size of the factory is fixed.
D)In the short run there are no fixed costs.

Question 58

Which costs do NOT vary with the amount of output a firm produces

A)average fixed costs
B)fixed costs and average fixed costs
C)marginal costs and average fixed costs
D)fixed costs

Question 59

Suppose Jan is starting up a small lemonade stand business at the local farmer's market.What would be included in variable costs for Jan's lemonade stand

A)the cost of building the lemonade stand
B)the cost of hiring an artist to design a logo for her sign
C)the cost of lemons
D)the monthly fee for renting space at the market

Question 60

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

Refer to Figure 13-2.Which statement describes the shape of the total-cost curve

A)Producing an additional cookie always costs more that the cost of 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 were previously produced.
D)Producing additional cookies becomes increasingly costly only when the number of cookies previously produced is large.

Question 61

Scenario 13-4
A firm experiences decreasing marginal product of labour with the addition of each worker regardless of the current output level.
Refer to Scenario 13-4.How will average fixed cost behave

A)It will always rise.
B)It will always fall.
C)It will be U-shaped, first falling and then rising.
D)It will remain constant.

Question 62

How does the average-fixed-cost curve behave

A)It always declines with increased levels of output.
B)It always rises with increased levels of output.
C)It declines as long as it is above marginal cost.
D)It declines as long as it is below marginal cost.

Question 63

Scenario 13-4
A firm experiences decreasing marginal product of labour with the addition of each worker regardless of the current output level.
Refer to Scenario 13-4.How will average variable cost behave

A)It will always rise.
B)It will always fall.
C)It will be U-shaped, first falling and then rising.
D)It will remain constant.

Question 64

What does average total cost tell us

A)the total cost of the first unit of output, if total cost is divided evenly over all the units produced
B)the cost of a typical unit of output, if total cost is divided evenly over all the units produced
C)the cost of the last unit of output, if total cost does not include a fixed cost component
D)the variable cost of a firm that is producing at least one unit of output

Question 65

What does marginal cost equal

A)total cost divided by quantity of output produced
B)total output divided by the change in total cost
C)the change of total cost divided by the change of output
D)average cost divided by output

Question 66

Why is average total cost very high when a small amount of output is produced

A)Average variable cost is high.
B)Average fixed cost is high.
C)Marginal cost is high.
D)Marginal cost is low.

Question 67

Scenario 13-4
A firm experiences decreasing marginal product of labour with the addition of each worker regardless of the current output level.
Refer to Scenario 13-4.How will marginal cost behave

A)It will always rise.
B)It will always fall.
C)It will be U-shaped, first falling and then rising.
D)It will remain constant.

Question 68

What is happening when marginal cost is less than average total cost

A)Marginal cost must be falling.
B)Average variable cost must be falling.
C)Average total cost must be falling.
D)Marginal cost must be rising.

Question 69

What does marginal cost tell us

A)the value of all resources used in a production process
B)the additional profit earned when output is increased by one unit
C)the amount by which total cost rises when output is increased by one unit
D)the amount by which output rises when labour is increased by one unit

Question 70

What does variable cost divided by quantity produced equal

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

Question 71

What does average total cost equal

A)change in total costs divided by quantity produced
B)change in total costs divided by change in quantity produced
C)(fixed costs plus variable costs) divided by quantity produced
D)(fixed costs plus variable costs) divided by change in quantity produced

Question 72

Scenario 13-4
A firm experiences decreasing marginal product of labour with the addition of each worker regardless of the current output level.
Refer to Scenario 13-4.How will average total cost behave

A)It will always rise.
B)It will always fall.
C)It will be U-shaped, first falling and then rising.
D)It will remain constant.

Question 73

What is average total cost equal to

A)output divided by total variable cost
B)average cost minus average quantity of output
C)average variable cost plus total fixed cost
D)total cost divided by output

Question 74

If marginal cost is rising,what must be happening

A)Average variable cost must be falling.
B)Average fixed cost must be rising.
C)Marginal product must be falling.
D)Marginal product must be rising.

Question 75

What does diminishing marginal product imply

A)The marginal cost of an extra worker is unchanged.
B)The marginal cost of an extra worker is less than the previous worker's marginal cost.
C)The marginal product of an extra worker is less than the previous worker's marginal product.
D)The marginal product of an extra worker is greater than the previous worker's marginal product.

Question 76

When marginal cost exceeds average total cost,what do we know

A)Average fixed cost must be rising.
B)Average total cost must be rising.
C)Average total cost must be falling.
D)Marginal cost must be falling.

Question 77

What does diminishing marginal product suggest

A)Additional units of output become less costly as more output is produced.
B)Marginal cost is upward sloping.
C)The firm is at full capacity.
D)Average product is rising.

Question 78

What is the cost of producing an additional unit of output

A)the firm's marginal cost
B)the firm's marginal product
C)the firm's variable cost
D)the firm's average variable cost

Question 79

What type of cost is the amount by which total cost rises when the firm produces one additional unit of output

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

Question 80

Figure 13-3

Refer to Figure 13-3.Which of the marginal-cost curves reflects the existence of diminishing marginal product

A)A
B)B
C)C
D)D