Deck 10: Organizing Production

Question 1

Flora's Flowers bought a new van last year for $10,000.It can now sell the car for $8,500.To buy this year's model it would have to pay $11,000.Flora's also had to take out a $9,000 loan to buy the van which had to be paid back in yearly installments of $3,300 per year over three years.What is the implicit rental rate of the first year's use of the van?

A)$2,800
B)$1,300
C)$1,800
D)$13,300
E)$4,800

Answer 1

C

Question 2

In general, (1) opportunity cost is greater than accounting cost.
(2) opportunity cost is less than accounting cost.
(3) economic profit is greater than accounting profit.
(4) economic profit is less than accounting profit.

A)1 only
B)1 and 3
C)1 and 4
D)2 and 3
E)2 and 4

Answer 2

C

Question 3

Which one of the following statements about the implicit rental rate of capital is true?

A)It is the market value of capital.
B)It is the opportunity cost to a firm of using its own capital.
C)It includes normal profit.
D)It is the amount paid for the use of land or buildings.
E)It is the depreciated value of capital.

Answer 3

B

Question 4

Flora's Flowers bought a new van last year for $10,000.It can now sell the van for $8,500.To buy this year's model of the same van it would have to pay $11,000.What is the implicit rental rate using the car for one year at a zero percent interest rate?

A)$2,500
B)$3,500
C)$1,000
D)$10,000
E)$1,500

Question 5

Use the information below to answer the following questions.
Fact 10.1.1 The Colvin Interview: Chrysler
The key driver of profitability will be that the focus of the company isn't on profitability. Our focus is on the customer. If we can find a way to give customers what they want better than anybody else, then what can stop us?
Source: Fortune, April 14, 2008
Refer to Fact 10.1.1.In spite of what Chrysler's vice chairman and co-president claims, Chrysler's focus actually is on profitability because

A)all car firms are greedy.
B)without profitability the UAW will be unable to negotiate high enough wage rates for its members.
C)without a focus on profitability, Chrysler will either be eliminated from the market or taken over by another firm.
D)without a focus on profitability, Chrysler will face an unreasonably high implicit rental rate.
E)without profitability, Chrysler will not have enough money for research and development.

Question 6

Economic depreciation is

A)the same as depreciation calculated by an accountant.
B)equal to economic profit minus normal profit.
C)the change in the market value of capital over a given period.
D)the deterioration of the physical appearance of a capital.
E)paid in cash.

Question 7

A firm's total opportunity cost of production is the sum of the cost of using resources

A)bought in the market.
B)owned by the firm.
C)supplied by the firm's owner.
D)bought in the market and supplied by the firm's owner.
E)bought in the market, owned by the firm, and supplied by the firm's owner.

Question 8

Normal profit is the ________.Normal profit ________ part of a firm's opportunity cost.

A)return that an entrepreneur can expect to receive on the average; is
B)profit used by the Canada Revenue Agency to calculate tax owing; is
C)profit used by the Canada Revenue Agency to calculate tax owing; is not
D)return that an entrepreneur can expect to receive on the average; is not
E)difference between total revenue and total cost; is

Question 9

Which one of the following is included in the implicit rental rate of capital?

A)economic depreciation
B)the cost of electricity
C)the cost of raw materials
D)the cost of low-skilled labour
E)the cost of heating

Question 10

The difference in the market value of a new van owned by a firm and the market value of the same van one year later is

A)economic depreciation.
B)physical depreciation.
C)economic deterioration.
D)physical deterioration.
E)conventional depreciation.

Question 11

Flora's Flowers bought a new van last year for $10,000.It can now sell the van for $8,500.To buy this year's model of the same van it would have to pay $11,000.What is the one-year amount of economic depreciation?

A)$2,500
B)$1,500
C)$1,000
D)$10,000
E)$3,500

Question 12

Gerald is a freelance writer who could work for a newspaper at $25,000 a year but instead runs his own business making revenue of $40,000 a year.His only business expenses are $1,000 for writing materials and $12,000 for rent.What is Gerald's economic profit from working as a freelance writer?

A)$2,000
B)$28,000
C)$15,000
D)$25,000
E)$27,000

Question 13

A firm's opportunity cost includes

A)the cost of using resources bought in the market and owned by the firm only.
B)the cost of using resources bought in the market, owned by the firm, and supplied by the firm's owner.
C)only costs that are paid in cash or by cheque.
D)the cost of using resources supplied by the firm's owner only.
E)economic profit.

Question 14

If economic profit is equal to zero, then the entrepreneur is making

A)a normal profit.
B)zero profit as recorded by accountants.
C)negative profit as recorded by accountants.
D)zero taxable income.
E)an amount equal to the implicit rental rate.

Question 15

A firm's goal is to

A)maximize revenue.
B)maximize cost while minimizing revenue.
C)maximize profit.
D)minimize costs.
E)minimize risk.

Question 16

The implicit rental rate

A)is the firm's opportunity cost of using the capital it owns.
B)is paid with cash.
C)has two components: economic depreciation and foregone interest.
D)both A and C are correct.
E)both B and C are correct.

Question 17

Which of the following is part of a firm's opportunity cost of production? I. wages
II. utility costs
III. interest on a bank loan
IV. interest forgone on funds used to buy capital equipment

A)I only
B)II only
C)III only
D)IV only
E)I, II, III, and IV

Question 18

The implicit rental rate to a firm of owning a building is

A)the sum of economic depreciation and foregone interest.
B)economic depreciation only.
C)foregone interest only.
D)the cost of using an alternative building.
E)the rent paid on the building.

Question 19

Economic profit equals total revenue minus

A)the cost of resources bought in the market.
B)the implicit rental rate.
C)the opportunity cost of production.
D)the cost of resources supplied by the owner.
E)the cost of resources owned by the firm.

Question 20

A profit-maximizing firm is constrained by all of the following except

A)demand for its product.
B)limited resources.
C)available technology.
D)limited information.
E)location.

Question 21

A firm that is technologically efficient

A)always makes an economic profit.
B)must be economically efficient, but a firm that is economically efficient is not always technologically efficient.
C)must be economically efficient, and a firm that is economically efficient must always be technologically efficient.
D)is not always economically efficient, and a firm that is economically efficient is not always technologically efficient.
E)is not always economically efficient, but a firm that is economically efficient must always be technologically efficient.

Question 22

The legal responsibility for debts incurred by a sole proprietorship falls upon

A)the shareholders.
B)the partners of the sole proprietorship.
C)the owner.
D)the creditors.
E)the managers.

Question 23

A firm uses capital and labour in production.To determine if the firm is technologically efficient, it

A)must know the cost of labour and the cost of capital.
B)does not need to know the cost of labour or the cost of capital.
C)must know the cost of labour but not the cost of capital.
D)must know the cost of capital but not the cost of labour.
E)must use unionized labour.

Question 24

In the relationship between the owner of a bakery and the baker, the owner is

A)an agent, as is the baker.
B)an agent and the baker is a principal.
C)a principal and the baker is an agent.
D)a principal, as is the baker.
E)neither a principal nor an agent, but the baker is an agent.

Question 25

Use the information below to answer the following questions.
Fact 10.1.1 The Colvin Interview: Chrysler
The key driver of profitability will be that the focus of the company isn't on profitability. Our focus is on the customer. If we can find a way to give customers what they want better than anybody else, then what can stop us?
Source: Fortune, April 14, 2008
Refer to Fact 10.1.1.If Chrysler doesn't focus on maximizing profit, but instead focuses their production and pricing decisions to "give customers what they want", Chrysler would

A)eventually incur a loss and either leave the market or be taken over by another firm.
B)force foreign competition out of the North American car market.
C)eventually force the other North American car producers out of the North American car market.
D)definitely and permanently increase market share.
E)lower the prices of their vehicles to the point at which price equals opportunity cost.

Question 26

A firm with a single owner who has unlimited liability is

A)a corporation.
B)a sole proprietorship.
C)a limited partnership.
D)an unlimited partnership.
E)a cooperative.

Question 27

Use the table below to answer the following questions.
Table 10.2.2
Three methods of making one medical hologram

Refer to Table 10.2.2.If the price of labour is $20 per unit and the price of capital is $10 per unit, which method is economically efficient?

A)1 only
B)2 only
C)3 only
D)2 and 3 only
E)1 and 3 only

Question 28

Emma owns a firm that produces umbrellas.Currently, Emma produces 2,500 umbrellas a day.Emma cannot produce more umbrellas in a day unless she purchases another machine or else hires more workers.Emma is ________ efficient.

A)economically
B)economically and technologically
C)technologically
D)not
E)capital and labour

Question 29

Use the table below to answer the following questions.
Table 10.2.2
Three methods of making one medical hologram

In Table 10.2.2, which method of making a medical hologram is technologically efficient?

A)1 only
B)2 only
C)3 only
D)all of the above
E)1 and 3 only

Question 30

Firm A can produce a unit of output with 10 hours of labour and 5 units of capital.Firm B can produce a unit of output with 5 hours of labour and 10 units of capital.Firm C can produce a unit of output with 10 hours of labour and 10 units of capital.If the prices of labour and material are $10 and $5, respectively which firm is technologically efficient?

A)A only
B)B only
C)C only
D)A and B
E)A and C

Question 31

A firm that uses the latest technology ________ technologically efficient because ________.

A)is not necessarily; the firm might not use the least amount of inputs to produce a given output
B)is not necessarily; new technology is more expensive than old technology
C)is; efficiency is about costs rather than when the technology was developed
D)is; new technology isn't developed unless it is efficient
E)is; most consumers want access to the latest technology

Question 32

Use the table below to answer the following questions.
Table 10.2.1

Refer to Table 10.2.1.If the price of labour is $10 per unit and the price of capital is $20 per unit, which method is economically efficient?

A)1 only
B)2 only
C)3 only
D)all of the above
E)1 and 3 only

Question 33

Use the table below to answer the following questions.
Table 10.2.1

Refer to Table 10.2.1, which shows three methods for making photon torpedoes.Which method is technologically efficient?

A)1 only
B)2 only
C)3 only
D)all of the methods
E)1 and 3 only

Question 34

Use the information below to answer the following questions.
Fact 10.2.1
Consider the following three methods of preparing your tax return. Method A uses a personal computer (cost equal to $1,000)and 1 hour of your time. Method B uses a calculator (cost equal to $30)and 12 hours of your time. Method C uses pen and paper (cost equal to $1)and 2 days (16 hours)of your time.
Consider Fact 10.2.1.Which production method is technologically inefficient?

A)A
B)B
C)C
D)all of the above
E)none of the above

Question 35

To produce a unit of output, Alphaworks uses 10 hours of labour and 5 kilograms of material.Betaworks uses 5 hours of labour and 10 kilograms of material, and Gammaworks uses 10 hours of labour and 10 kilograms of material.If labour costs $10 per hour and material costs $5 per kilogram, which firm is economically efficient?

A)Alphaworks only
B)Betaworks only
C)Gammaworks only
D)Alphaworks and Betaworks
E)Alphaworks and Gammaworks

Question 36

Use the information below to answer the following questions.
Fact 10.2.1
Consider the following three methods of preparing your tax return. Method A uses a personal computer (cost equal to $1,000)and 1 hour of your time. Method B uses a calculator (cost equal to $30)and 12 hours of your time. Method C uses pen and paper (cost equal to $1)and 2 days (16 hours)of your time.
Consider Fact 10.2.1.Choose the best statement.

A)When your wage rate is $5 per hour, the economically efficient method is method C.
B)When your wage rate is $50 per hour, the economically efficient method is method B.
C)When your wage rate is $500 per hour, the economically efficient method is method A.
D)all of the above
E)B and C only

Question 37

Which one of the following statements is true?

A)All technologically efficient methods are also economically efficient.
B)All economically efficient methods are also technologically efficient.
C)Technological efficiency changes with changes in relative input prices.
D)Technologically efficient firms will be more likely to survive than economically efficient firms.
E)Technological efficiency is more important than economical efficiency.

Question 38

Some firms use large amounts of capital and small amounts of labour, while others use small amounts of capital and large amounts of labour to

A)use surpluses of labour and capital and eliminate unemployment of these resources.
B)use the best available technology.
C)use the resources that are most readily available.
D)maximize profit.
E)maximize production.

Question 39

Which one of the following statements is not true?

A)A production process is technologically efficient only if it is producing a given output at the lowest possible cost.
B)If a process is economically efficient, it must be technologically efficient as well.
C)Economic efficiency depends on the relative price of inputs, while technological efficiency does not.
D)Economically efficient firms will be more likely to survive than economically inefficient firms.
E)Technologically efficient firms are more likely to survive than technologically inefficient firms.

Question 40

Use the information below to answer the following question.
Fact 10.2.2 A Medical Sensation
Hospitals are buying da Vinci surgical robots. Surgeons, sitting comfortably at a da Vinci console, can use various robotic attachments to perform even the most complex procedures.
Source: Fortune, April 28, 2008
Refer to Fact 10.2.2.Assume that performing a surgery with a surgical robot requires fewer surgeons and nurses.Using the surgical robot ________ technologically efficient.We would need additional information about ________ to determine if switching to surgical robots is economically efficient for a hospital.

A)is not; the cost of surgery with a surgical robot and the cost of surgery without a surgical robot
B)is not; the success rate of operations with surgical robots compared to the success rate of operations using other methods
C)is; the success rate of operations with surgical robots compared to the success rate of operations using other methods
D)is; the cost of surgery with a surgical robot and the cost of surgery without a surgical robot
E)is not; clinical trials

Question 41

Federal Express enters into contracts with independent truck operators who offer FedEx service and who are rewarded by the volume (cubic feet)of packages they carry. FedEx does not hire more independent drivers because

A)it is concerned about a possible downturn in the economy and the effects of overexpansion.
B)it cannot afford more trucks and more drivers.
C)of the principal-agent problem.
D)it is a corporation, so it wants to have a limited number of independent truck owners operating as proprietorships.
E)trucks are not a technologically efficient method of transporting parcels.

Question 42

A sole proprietorship

A)dies with the owner.
B)is the same as a partnership.
C)always bring a higher return to its owner than a corporation brings to its owners.
D)is a not-for-profit firm.
E)has a complex management structure.

Question 43

Firms organize production by using

A)command systems only.
B)incentive systems only.
C)command and incentive systems.
D)market systems only.
E)principal-agent systems only.

Question 44

Typical examples of a partnership would include which one of the following?

A)a law firm
B)a corner drugstore
C)an automobile manufacturer
D)a bank
E)a freelance writer

Question 45

Which one of the following is an advantage of a corporation relative to a proprietorship or partnership?

A)Owners have limited liability.
B)Profits are taxed once.
C)difficult to raise money
D)no principal-agent problems
E)simple management structure

Question 46

The possibility that an employee may not work hard is an example of the

A)limited liability problem.
B)principal-agent problem.
C)transactions cost problem.
D)technological efficiency problem.
E)partnership problem.

Question 47

A golf club manufacturer pays its workers based on the number of sets of clubs they produce.This firm

A)organizes production based on a command system.
B)does not have a principal-agent problem.
C)is a sole proprietorship.
D)organizes production based on an incentive system.
E)is a corporation.

Question 48

Firm strategies for coping with the principal-agent problem are

A)ownership, incentive pay, and long-term contracts.
B)sole proprietorship, partnership, and the corporation.
C)economies of scale, scope, and team production.
D)technology, information, and the market.
E)ownership, scope, and the market.

Question 49

It is a disadvantage of ________ that retained profits are taxed twice. It is a disadvantage of ________ that bad decisions are not checked by the need for consensus.

A)a sole proprietorship; both a partnership and a sole proprietorship
B)a corporation; a sole proprietorship
C)both a partnership and a sole proprietorship; a partnership
D)a corporation; both a partnership and a sole proprietorship
E)both a corporation and a partnership; a sole proprietorship

Question 50

What is a disadvantage of a corporation relative to a sole proprietorship or partnership?

A)Owners have unlimited liability.
B)Profits are taxed twice: as corporate profits and as dividend income and capital gains to stockholders.
C)high cost of capital
D)perpetual life
E)dies with the owner

Question 51

Most establishments in Canada

A)employ between 5 and 99 people.
B)employ more than 100 people.
C)employ fewer than 5 people.
D)employ more than 500 people.
E)are partnerships.

Question 52

Susan invests $1,000 to buy shares of TooNew stock.The company declares bankruptcy, leaving many debts unpaid, including Susan's $1,000 investment.Susan has a personal net worth of $50,000.What will be Susan's final net worth if TooNew has total unpaid debts of $30,000?

A)$19,000
B)$21,000
C)$49,000
D)$51,000
E)$20,000

Question 53

A firm with two or more owners who have unlimited liability is

A)a sole proprietorship.
B)a partnership.
C)a conglomerate.
D)a corporation.
E)a public company.

Question 54

The principal-agent problem exists when

A)there is no command system in place.
B)firms operate as sole proprietorships.
C)agents do not act in the best interest of principals.
D)principals do not act in the best interest of agents.
E)the future value of money is more than its current value.

Question 55

A firm with one or more owners of limited liability is

A)a sole proprietorship.
B)a partnership.
C)a conglomerate.
D)a corporation.
E)a public company.

Question 56

Use the information below to answer the following questions.
Fact 10.3.1 Executive Pay
Executive compensation, based on performance, can theoretically constrain pay, but companies are paying their top executives more and more. The median compensation of a CEO in 2013 was $13.9 million, up 9 percent from 2012
Source: CNBC, April 28, 2014
Refer to Fact 10.3.1.CEO compensation schemes are designed to solve

A)the principal-agent problem.
B)the problem of CEOs without long-term labour contracts.
C)the problem of slow and expansive decision-making in a complex management structure.
D)the problem that many CEOs lose all of their wealth if the corporation goes bankrupt.
E)the problem of the CEO being taxed twice-once on salary income and once on dividend income.

Question 57

In a partnership, each partner is legally liable for

A)all the debts of the partnership.
B)the fraction of the debts corresponding to the fraction of ownership.
C)50 percent of the debt.
D)all debts of the partnership limited by the personal wealth of the partner.
E)an amount of debt limited to the amount of the partner's investment in the partnership.

Question 58

The profits of a sole proprietorship are

A)taxed twice.
B)subject to a corporate tax.
C)not taxed.
D)exempt from taxation.
E)treated as the owner's income.

Question 59

Mr.Brown opens his restaurant as a sole proprietorship.After a year of disastrous reviews, he has gone deeply into debt. His liability is

A)zero; he has already lost all his money.
B)the amount of his original investment.
C)limited only by his entire wealth.
D)limited to assets owned by the restaurant.
E)depends upon how much money he has in his savings account.

Question 60

Firms cope with uncertainty and incomplete information by using

A)sole proprietorship, limited liability, and market coordination.
B)ownership, incentive pay, and long-term contracts.
C)team production, economies of scale, and transactions costs.
D)the market, the firm, and internal organization.
E)team production, economies of scale, and transaction costs.

Question 61

One difference between oligopoly and monopolistic competition is

A)there is a smaller number of firms in a monopolistically competitive market than in an oligopoly.
B)in oligopolies firms make slightly different products whereas in monopolistic competition the products are identical.
C)monopolistic competition has barriers to entry, whereas oligopoly has none.
D)fewer firms compete in an oligopoly than in a monopolistically competitive market.
E)in oligopolies, firms are typically smaller in size.

Question 62

Use the information below to answer the following questions.
Fact 10.3.1 Executive Pay
Executive compensation, based on performance, can theoretically constrain pay, but companies are paying their top executives more and more. The median compensation of a CEO in 2013 was $13.9 million, up 9 percent from 2012
Source: CNBC, April 28, 2014
Refer to Fact 10.3.1.Paying executives with stock will

A)discourage the CEO.
B)decrease CEO compensation and make them work harder.
C)tie the CEO's compensation to the company's fortunes.
D)limit the size of corporations.
E)increase the size of corporations.

Question 63

When the Herfindahl-Hirschman Index (HHI)is greater than 1,800,

A)the market is very competitive.
B)a monopoly exists.
C)there are many producers in the market.
D)the market is moderately competitive.
E)the market is uncompetitive.

Question 64

The purpose of calculating the concentration ratio is

A)to obtain the firm's total profit.
B)to obtain the firm's production cost.
C)to measure the losses the firm incurred.
D)to measure the extent to which the market is dominated by a small number of firms.
E)to distinguish between the firm's total profit and production cost.

Question 65

In a monopoly, the four-firm concentration ratio is

A)75 percent.
B)100 percent.
C)almost zero.
D)25 percent.
E)50 percent.

Question 66

The Herfindahl-Hirschman Index is calculated as

A)the cube of the percentage market share of each firm summed over the largest 100 firms.
B)the square of the percentage market share of each firm summed over the largest 50 firms or summed over all the firms if there are fewer than 50.
C)the square of the percentage market share of each firm summed over the largest 20 firms.
D)double the market share of the five largest firms.
E)none of the above

Question 67

In a perfectly competitive market, the four-firm concentration ratio is

A)almost zero.
B)50 percent.
C)100 percent.
D)75 percent.
E)25 percent.

Question 68

The four-firm concentration ratio tells us the percentage of ________ for the four largest firms in an industry.

A)employment
B)accounting profit
C)economic profit
D)the value of sales
E)physical output

Question 69

The Herfindahl-Hirschman Index (HHI)is the square of the percentage market share of each firm summed over the ________ firms in a market.

A)largest 60
B)largest 50
C)smallest 50
D)largest 75
E)smallest 60

Question 70

In a perfectly competitive market, the Herfindahl-Hirschman Index (HHI)

A)is small.
B)is usually greater than 5,000.
C)is greater than 1,000 but less than 2,000.
D)lies between 1,200 and 1,500.
E)is greater than 10,000.

Question 71

One difference between perfect competition and monopolistic competition is

A)firms in a perfectly competitive market produce similar but slightly different products.
B)in perfect competition, the product produced has no close substitutes.
C)monopolistic competition has barriers to entry, whereas perfect competition has none.
D)firms in monopolistic competition have some degree of market power.
E)a small number of firms compete in a monopolistically competitive market and a large number of firms compete in a perfectly competitive market.

Question 72

A four-firm concentration ratio of less than 60 percent indicates

A)a monopoly.
B)a market that is dominated by a few firms.
C)a competitive market.
D)an oligopoly.
E)an absence of competition.

Question 73

A market in which the Herfindahl-Hirschman Index (HHI)lies between 1,000 and 1,800 is regarded as being

A)a monopoly.
B)an oligopoly.
C)a perfectly competitive market.
D)a moderately competitive market.
E)a potential matter of concern for regulators.

Question 74

Use the table below to answer the following questions.
Table 10.4.1

Refer to Table 10.4.1.The four-firm concentration ratio for taco stands is

A)15 percent.
B)100 percent.
C)80 percent.
D)33 percent.
E)30 percent.

Question 75

The four-firm concentration ratio measures the share of the largest four firms in total industry

A)profit.
B)sales.
C)cost.
D)capital.
E)loss.

Question 76

What is the maximum value of the Herfindahl-Hirschman Index?

A)1
B)1,000,000
C)100,000
D)10,000
E)1,000

Question 77

Which one of the following statements describes a market that is monopolistically competitive?

A)There are significant barriers to entry.
B)The products produced by the firms are identical.
C)Many firms compete by making similar but slightly different products.
D)There is a small number of large firms.
E)The product produced by one firm has no close substitutes.

Question 78

Use the table below to answer the following questions.
Table 10.4.1

Refer to Table 10.4.1.The four-firm concentration ratio for the pizza sellers is

A)40 percent.
B)100 percent.
C)80 percent.
D)33 percent.
E)12.5 percent.

Question 79

An industry with a high four-firm concentration ratio may have little monopoly power if

A)its production is geographically concentrated.
B)its barriers to entry are low.
C)its barriers to entry are high.
D)there are no international producers of the product.
E)there are no close substitutes for its product.

Question 80

A four-firm concentration ratio that exceeds 60 percent indicates

A)a perfectly competitive market.
B)a monopolistically competitive market.
C)a monopoly.
D)an oligopoly.
E)a competitive market.