Deck 7: The Production Process: the Behavior of Profit-Maximizing Firms

Question 1

Economic costs

A) include both a normal rate of return on investment and the opportunity cost of each factor of production.
B) are equal to the direct costs of hiring all factors of production.
C) are the opportunity cost of each factor of production minus any interest charges paid on borrowed funds.
D) are equal to total revenue minus accounting profit.

Answer 1

A

Question 2

The Wax Works sells 400 candles at a price of $6 per candle. The Wax Works' total costs for producing 400 candles are $2,500. The Wax Works' economic profit is

A) -$100.
B) $0.
C) $2,400.
D) $2,500.

Answer 2

A

Question 3

The Oh So Humble Bakery sells 300 muffins at a price of $1 per muffin. Its explicit costs for producing 300 muffins are $250. If the bakery is earning a normal rate of return, then implicit costs must be

A) $50.
B) $100.
C) $250.
D) $350.

Answer 3

A

Question 4

Refer to Scenario 7.1 below to answer the questions that follow.
SCENARIO 7.1: You are the owner and only employee of a company that writes computer software that is used by gamblers to collect sports data. Last year you earned a total revenue of $90,000. Your costs for equipment, rent, and supplies were $60,000. To start this business you invested an amount of your own capital that could pay you a return of $40,000 a year.
Refer to Scenario 7.1. During the year your economic costs were

A) $40,000.
B) $60,000.
C) $100,000.
D) $130,000.

Question 5

Refer to the information provided in Figure 7.1 below to answer the following questions. Figure 7.1
Refer to Figure 7.1. This corn producer earns a total revenue of $900. Each bushel of corn is sold for $5. This corn producer must be selling ________ bushels of corn.

A) 180
B) 450
C) 900
D) 4,500

Question 6

Refer to Scenario 7.2 below to answer the questions that follow.
SCENARIO 7.2: You are the owner and only employee of a company that sets odds for sporting events. Last year you earned a total revenue of $100,000. Your costs for rent and supplies were $50,000. To start this business you invested an amount of your own capital that could pay you a return of $20,000 a year.
Refer to Scenario 7.2. Your accounting profit last year was

A) $10,000.
B) $30,000.
C) $50,000.
D) $60,000.

Question 7

Refer to Scenario 7.1 below to answer the questions that follow.
SCENARIO 7.1: You are the owner and only employee of a company that writes computer software that is used by gamblers to collect sports data. Last year you earned a total revenue of $90,000. Your costs for equipment, rent, and supplies were $60,000. To start this business you invested an amount of your own capital that could pay you a return of $40,000 a year.
Refer to Scenario 7.1. Your economic profit last year was

A) -$40,000.
B) -$10,000.
C) $10,000.
D) $30,000.

Question 8

Refer to the information provided in Figure 7.1 below to answer the following questions. Figure 7.1
Refer to Figure 7.1. A corn producer's profit is $200 and is producing 100 bushels of corn. Then he must have a cost per bushel of ________.

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

Question 9

Refer to Scenario 7.1 below to answer the questions that follow.
SCENARIO 7.1: You are the owner and only employee of a company that writes computer software that is used by gamblers to collect sports data. Last year you earned a total revenue of $90,000. Your costs for equipment, rent, and supplies were $60,000. To start this business you invested an amount of your own capital that could pay you a return of $40,000 a year.
Refer to Scenario 7.1. Your accounting profit last year was

A) $10,000.
B) $30,000.
C) $50,000.
D) $60,000.

Question 10

Refer to Scenario 7.1 below to answer the questions that follow.
SCENARIO 7.1: You are the owner and only employee of a company that writes computer software that is used by gamblers to collect sports data. Last year you earned a total revenue of $90,000. Your costs for equipment, rent, and supplies were $60,000. To start this business you invested an amount of your own capital that could pay you a return of $40,000 a year.
Refer to Scenario 7.1. A yearly normal rate of return for your computer software firm would be

A) $20,000.
B) $40,000.
C) $60,000.
D) $100,000.

Question 11

Refer to the information provided in Figure 7.1 below to answer the following questions. Figure 7.1
Refer to Figure 7.1. This corn producer produces 100 bushels of corn and sells each bushel at $5. The cost of producing each bushel is $2. This corn producer's total revenue is ________ and profit is ________.

A) $200; $300
B) $300; $200
C) $500; $200
D) $500; $300

Question 12

If economic profit is zero, a firm

A) earns a negative rate of return.
B) will leave the industry.
C) earns a positive but below normal rate of return.
D) earns exactly a normal rate of return.

Question 13

Refer to Scenario 7.2 below to answer the questions that follow.
SCENARIO 7.2: You are the owner and only employee of a company that sets odds for sporting events. Last year you earned a total revenue of $100,000. Your costs for rent and supplies were $50,000. To start this business you invested an amount of your own capital that could pay you a return of $20,000 a year.
Refer to Scenario 7.2. During the year your economic costs were

A) $70,000.
B) $60,000.
C) $50,000.
D) $20,000.

Question 14

The Oh So Humble Bakery sells 300 muffins at a price of $1 per muffin. Its explicit costs for producing 300 muffins are $250. The Oh So Humble Bakery's economic profits are

A) $35.
B) $50.
C) $250.
D) indeterminate from this information.

Question 15

Perfectly competitive firms must make all of the following decisions EXCEPT

A) how much output to supply.
B) which production technology to use.
C) how much of each input to demand.
D) what price to charge for its output.

Question 16

Refer to Scenario 7.2 below to answer the questions that follow.
SCENARIO 7.2: You are the owner and only employee of a company that sets odds for sporting events. Last year you earned a total revenue of $100,000. Your costs for rent and supplies were $50,000. To start this business you invested an amount of your own capital that could pay you a return of $20,000 a year.
Refer to Scenario 7.2. A yearly normal rate of return for your company is

A) $20,000.
B) $40,000.
C) $60,000.
D) $100,000.

Question 17

The Wax Works sells 400 candles at a price of $10 per candle. The Wax Works' total costs for producing 400 candles are $500. The Wax Works' economic profit is

A) -$100.
B) $3,500.
C) $4,500.
D) indeterminate from this information.

Question 18

The Sweet Success Bakery sells 400 cakes at a price of $10 per cake. Its total economic costs for producing 400 cakes are $500. The Sweet Success Bakery's economic profits are

A) $100.
B) $3,500.
C) $4,500.
D) indeterminate from this information.

Question 19

You own a building that has four possible uses: a cafe, a craft store, a hardware store, and a bookstore. The value of the building in each use is $2,000; $3,000; $4,000; and $5,000, respectively. You decide to open a hardware store. The opportunity cost of using this building for a hardware store is

A) $2,000, the value if the building is used as a cafe.
B) $3,000, the value if the building is used as a craft store.
C) $10,000, the sum of the values if the building is used for a cafe, a craft store, or a bookstore.
D) $1,000, the difference in value if the building was used as a bookstore and its actual use.

Question 20

Total revenue minus total cost is equal to

A) the rate of return.
B) marginal revenue.
C) profit.
D) net cost.

Question 21

To determine the optimal method of production for a good or service, a perfectly competitive firm needs to know all of the following EXCEPT

A) the market price of output.
B) the technologies of production that are available to the firm.
C) the prices of inputs.
D) the prices charged by its rivals.

Question 22

Refer to Scenario 7.3 below to answer the questions that follow.
SCENARIO 7.3: Upon graduating with an accounting degree, you open your own accounting firm of which you are the sole employee. To start the firm you passed on a job offer with a large accounting firm that offered you a salary of $60,000 annually. Last year you earned a total revenue of $100,000. Rent and supplies last year were $50,000.
Refer to Scenario 7.3. Your annual economic profit is

A) -$10,000.
B) $40,000.
C) $50,000.
D) $100,000.

Question 23

There are 100 dog kennels in Atlanta. An economist studying the pricing behavior of dog kennels tells you that she is limiting her analysis to a time period that does not allow for any new dog kennels to enter the industry or for any established dog kennels to leave the industry. The time period this economist referred to is the

A) market period.
B) industry run.
C) long run.
D) short run.

Question 24

Refer to Scenario 7.3 below to answer the questions that follow.
SCENARIO 7.3: Upon graduating with an accounting degree, you open your own accounting firm of which you are the sole employee. To start the firm you passed on a job offer with a large accounting firm that offered you a salary of $60,000 annually. Last year you earned a total revenue of $100,000. Rent and supplies last year were $50,000.
Refer to Scenario 7.3. Your annual economic costs are

A) $0.
B) $50,000.
C) $60,000.
D) $110,000.

Question 25

In the short run, a firm

A) has at least one fixed factor of production.
B) can enter an industry where positive profits are being earned.
C) can exit an industry, and all of its factors of production are variable.
D) both B and C are correct.

Question 26

Use the information provided in Table 7.1 below to answer the questions that follow.
Table 7.1
Inputs Required to Produce a Product Using Alternative Technologies $$\begin{array} { c c c } \text { Technology } & \text { Units of Capital } & \text { Number of Employees } \\\hline \text { A } & 4 & 18 \\\text { B } & 6 & 12 \\\text { C } & 8 & 8 \\\text { D } & 12 & 6\end{array}$$

-Refer to Table 7.1 above. Which technology is the most capital intensive?

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

Question 27

For economic analysis, the long run is any period in which all inputs are variable (regardless of the length of time involved).

Question 28

In the long run,

A) a firm can shut down, but it cannot exit the industry.
B) there are no fixed factors of production.
C) a firm can vary all inputs, but it cannot change the mix of inputs it uses.
D) all firms must make economic profits.

Question 29

Use the information provided in Table 7.1 below to answer the questions that follow.
Table 7.1
Inputs Required to Produce a Product Using Alternative Technologies $$\begin{array} { c c c } \text { Technology } & \text { Units of Capital } & \text { Number of Employees } \\\hline \text { A } & 4 & 18 \\\text { B } & 6 & 12 \\\text { C } & 8 & 8 \\\text { D } & 12 & 6\end{array}$$

-Refer to Table 7.1. If the hourly wage rate is $10 and the hourly price of capital is $25, which production technology should be selected?

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

Question 30

Deciding to invest in capital is a short-run decision.

Question 31

Refer to Scenario 7.3 below to answer the questions that follow.
SCENARIO 7.3: Upon graduating with an accounting degree, you open your own accounting firm of which you are the sole employee. To start the firm you passed on a job offer with a large accounting firm that offered you a salary of $60,000 annually. Last year you earned a total revenue of $100,000. Rent and supplies last year were $50,000.
Refer to Scenario 7.3. Your annual operating profit is

A) -$10,000.
B) $40,000.
C) $50,000.
D) $100,000.

Question 32

An act of production, as economists use the term, is demonstrated by which of the following?

A) A worker places money in a pension fund.
B) A local nonprofessional theater company performs a play.
C) An individual buys municipal bonds to avoid taxes.
D) A firm buys a pre-existing building in order to expand its operations.

Question 33

Use the information provided in Table 7.1 below to answer the questions that follow.
Table 7.1
Inputs Required to Produce a Product Using Alternative Technologies $$\begin{array} { c c c } \text { Technology } & \text { Units of Capital } & \text { Number of Employees } \\\hline \text { A } & 4 & 18 \\\text { B } & 6 & 12 \\\text { C } & 8 & 8 \\\text { D } & 12 & 6\end{array}$$

-Refer to Table 7.1 above. Which technology is the most labor intensive?

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

Question 34

Use the information provided in Table 7.1 below to answer the questions that follow.
Table 7.1
Inputs Required to Produce a Product Using Alternative Technologies $$\begin{array} { c c c } \text { Technology } & \text { Units of Capital } & \text { Number of Employees } \\\hline \text { A } & 4 & 18 \\\text { B } & 6 & 12 \\\text { C } & 8 & 8 \\\text { D } & 12 & 6\end{array}$$

-Refer to Table 7.1. If the hourly wage rate is $7 and the hourly price of capital is $10, which production technology should be selected?

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

Question 35

If a firm makes an economic profit, it is making at least a normal rate of return.

Question 36

If Harold runs a grocery store and is making a normal rate of return, we can infer that he is also making an economic profit.

Question 37

The optimal method of production is the one that

A) maximizes output regardless of cost.
B) maximizes inputs.
C) minimizes cost.
D) minimizes the normal rate of return.

Question 38

Refer to Scenario 7.2 below to answer the questions that follow.
SCENARIO 7.2: You are the owner and only employee of a company that sets odds for sporting events. Last year you earned a total revenue of $100,000. Your costs for rent and supplies were $50,000. To start this business you invested an amount of your own capital that could pay you a return of $20,000 a year.
Refer to Scenario 7.2. Your economic profit last year was

A) -$40,000.
B) -$10,000.
C) $10,000.
D) $30,000.

Question 39

In the short run, firms can enter an industry but not exit an industry.

Question 40

For economic analysis, the short run is considered less than one year.

Question 41

Refer to Scenario 7.4 below to answer the questions that follow.
SCENARIO 7.4: A lawn service company has the following production possibilities. With one, two, three, and four workers, the company can mow 4, 9, 12, and 14 lawns per day, respectively.
Refer to Scenario 7.4. The average product of labor with three workers is

A) 3
B) 3.5
C) 4
D) 12

Question 42

At the Larson Bakery the marginal products of the first, second, and third sales clerks are 20, 17, and 11 customers served, respectively. The total product (number of customers served) of the first two sales clerks is

A) 3.
B) 17.
C) 37.
D) 48.

Question 43

At the Larson Bakery the marginal products of the first, second, and third sales clerks are 20, 17, and 11 customers served, respectively. The total product (number of customers served) of the three sales clerks is

A) 11.
B) 40.
C) 46.
D) 48.

Question 44

Refer to the information provided in Figure 7.3 below to answer the questions that follow. Figure 7.3
Refer to Figure 7.3. The marginal product of the second worker is ________ yards raked.

A) 2
B) 13.5
C) 17
D) 27

Question 45

When Burger Barn hires one worker, 20 customers can be served in an hour. When Burger Barn hires two workers, 50 customers can be served in an hour. The marginal product of the second worker is ________ customers served per hour.

A) 15
B) 30
C) 40
D) 67.5

Question 46

Refer to Scenario 7.4 below to answer the questions that follow.
SCENARIO 7.4: A lawn service company has the following production possibilities. With one, two, three, and four workers, the company can mow 4, 9, 12, and 14 lawns per day, respectively.
Refer to Scenario 7.4. The marginal product of the third worker is

A) 2
B) 3
C) 4
D) 12

Question 47

At the Pampered Pet Salon the marginal products of the first, second, and third workers are 20, 16, and 10 dogs washed, respectively. The total product (number of dogs washed) of the three worker is

A) 15.33.
B) 30.
C) 46.
D) 138.

Question 48

Refer to Scenario 7.4 below to answer the questions that follow.
SCENARIO 7.4: A lawn service company has the following production possibilities. With one, two, three, and four workers, the company can mow 4, 9, 12, and 14 lawns per day, respectively.
Refer to Scenario 4. The marginal product of the second worker is

A) 3
B) 4
C) 5
D) 9

Question 49

Use the information provided in Table 7.2 below to answer the questions that follow.
Table 7.2
Inputs Required to Produce a Product Using Alternative Technologies $$\begin{array} { c c c } \text { Technology } & \text { Units of Capital } & \text { Number of Employees } \\\hline \text { A } & 16 & 8 \\\text { B } & 12 & 12 \\\text { C } & 8 & 20 \\\text { D } & 6 & 24\end{array}$$

-Refer to Table 7.2. If the hourly price of labor is $10 and the hourly price of capital is $1, which production technology should be selected?

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

Question 50

The marginal products of the first, second, and third workers are 20, 12, and 8, respectively. If four workers can produce 45 units of output, then the marginal product of the fourth worker is ________.

A) 4
B) 5
C) 40
D) 45

Question 51

Use the information provided in Table 7.2 below to answer the questions that follow.
Table 7.2
Inputs Required to Produce a Product Using Alternative Technologies $$\begin{array} { c c c } \text { Technology } & \text { Units of Capital } & \text { Number of Employees } \\\hline \text { A } & 16 & 8 \\\text { B } & 12 & 12 \\\text { C } & 8 & 20 \\\text { D } & 6 & 24\end{array}$$

-Refer to Table 7.2. Which technology is the most labor intensive?

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

Question 52

At the Pampered Pet Salon the marginal products of the first, second, and third workers are 20, 16, and 10 dogs washed, respectively. The total product (number of dogs washed) of the first two workers is

A) 16.
B) 20.
C) 36.
D) 46.

Question 53

Refer to the information provided in Figure 7.3 below to answer the questions that follow. Figure 7.3
Refer to Figure 7.3. The average product of the second worker is ________ yards raked.

A) 4
B) 13.5
C) 14
D) 27

Question 54

Use the information provided in Table 7.2 below to answer the questions that follow.
Table 7.2
Inputs Required to Produce a Product Using Alternative Technologies $$\begin{array} { c c c } \text { Technology } & \text { Units of Capital } & \text { Number of Employees } \\\hline \text { A } & 16 & 8 \\\text { B } & 12 & 12 \\\text { C } & 8 & 20 \\\text { D } & 6 & 24\end{array}$$

-Refer to Table 7.2. If the hourly wage rate is $10 and the hourly price of capital is $50, which production technology should be selected?

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

Question 55

Refer to the information provided in Figure 7.2 below to answer the questions that follow. Figure 7.2
Refer to Figure 7.2. The marginal product of the second worker is ________ lawns mowed.

A) 3
B) 5
C) 8
D) 11

Question 56

Refer to Scenario 7.4 below to answer the questions that follow.
SCENARIO 7.4: A lawn service company has the following production possibilities. With one, two, three, and four workers, the company can mow 4, 9, 12, and 14 lawns per day, respectively.
Refer to Scenario 7.4. The marginal product of the fourth worker is

A) 2
B) 3
C) 12
D) 14

Question 57

Refer to Scenario 7.4 below to answer the questions that follow.
SCENARIO 7.4: A lawn service company has the following production possibilities. With one, two, three, and four workers, the company can mow 4, 9, 12, and 14 lawns per day, respectively.
Refer to Scenario 7.4. Diminishing returns to labor set in with the ________ worker.

A) first
B) second
C) third
D) fourth

Question 58

Refer to Scenario 7.4 below to answer the questions that follow.
SCENARIO 7.4: A lawn service company has the following production possibilities. With one, two, three, and four workers, the company can mow 4, 9, 12, and 14 lawns per day, respectively.
Refer to Scenario 7.4. The average product of labor with four workers is

A) 3
B) 3.5
C) 4
D) 14

Question 59

Use the information provided in Table 7.2 below to answer the questions that follow.
Table 7.2
Inputs Required to Produce a Product Using Alternative Technologies $$\begin{array} { c c c } \text { Technology } & \text { Units of Capital } & \text { Number of Employees } \\\hline \text { A } & 16 & 8 \\\text { B } & 12 & 12 \\\text { C } & 8 & 20 \\\text { D } & 6 & 24\end{array}$$

-Refer to Table 7.2. Which technology is the most capital intensive?

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

Question 60

Refer to the information provided in Figure 7.2 below to answer the questions that follow. Figure 7.2
Refer to Figure 7.2. The average product of the second worker is ________ lawns mowed.

A) 4
B) 5
C) 5.5
D) 11

Question 61

Refer to the information provided in Figure 7.4 below to answer the questions that follow. Figure 7.4
Refer to Figure 7.4. The marginal product of the second worker is

A) 10.
B) 16.
C) 20.
D) 32.

Question 62

At the point where total product is maximized, marginal product

A) is zero, but average product is still positive.
B) and average product are negative.
C) is positive, but average product is negative.
D) and average product are positive.

Question 63

Refer to the information provided in Figure 7.4 below to answer the questions that follow. Figure 7.4
Refer to Figure 7.4. Diminishing marginal returns begin when the ________ worker is hired.

A) first
B) second
C) third
D) fifth

Question 64

Refer to the information provided in Figure 7.4 below to answer the questions that follow. Figure 7.4
Refer to Figure 7.4. The average product of the fifth worker is

A) 1.
B) 2.5.
C) 5.
D) 11.

Question 65

If labor is a variable input in production, the law of diminishing marginal returns implies that in the short run

A) labor's marginal product is constant.
B) labor's marginal product decreases after a certain point.
C) total product is negative.
D) total product is negative after a certain point has been reached.

Question 66

Refer to the information provided in Figure 7.4 below to answer the questions that follow. Figure 7.4
Refer to Figure 7.4. The average product of the third worker is

A) 10.
B) 14.
C) 30.
D) 126.

Question 67

Refer to the information provided in Figure 7.4 below to answer the questions that follow. Figure 7.4
Refer to Figure 7.4. The average product of the sixth worker is

A) -8.33.
B) -5.
C) 5.
D) 8.33.

Question 68

If the marginal product of labor is less than the average product of labor, then the

A) marginal product must be increasing.
B) average product must be decreasing.
C) marginal product must be decreasing.
D) Both B and C

Question 69

If marginal product is greater than average product, then

A) average product must be decreasing.
B) marginal product must be decreasing.
C) marginal product must be increasing.
D) marginal product could either be increasing or decreasing.

Question 70

The version of the law of diminishing returns that applies to production

A) implies that as we add more workers our output decreases.
B) applies only in the short run.
C) is true only when all inputs are variable.
D) applies in the short and long run.

Question 71

If we assume that labor is the only variable input, the slope of the total product curve in the short run

A) has no economic significance.
B) measures the average product of labor.
C) measures the marginal product of labor.
D) measures both the marginal and average product at all points on the total product curve.

Question 72

Refer to the information provided in the table below to answer the following question.
Table 7.3 $$\begin{array} { l l l l l l l } \mathrm { L } & 0 & 1 & 2 & 3 & 4 & 5 \\\hline Q & 0 & 10 & 20 & 30 & 40 & 50\end{array}$$

-Refer to the table above. Suppose output varies, ceteris paribus, with labor input in the following manner displayed above. After how many units of labor do diminishing returns set in?

A) 3
B) 4
C) 5
D) They do not set in.

Question 73

You own a business that answers telephone calls for physicians after their offices close. You have an incentive to substitute capital for labor if the

A) price of capital increases.
B) price of labor decreases.
C) price of capital decreases.
D) marginal product of labor increases.

Question 74

Refer to the information provided in Figure 7.4 below to answer the questions that follow. Figure 7.4
Refer to Figure 7.4. The marginal product of the sixth worker is

A) -50.
B) -5.
C) 5.
D) 8.33.

Question 75

Refer to the information provided in Figure 7.4 below to answer the questions that follow. Figure 7.4
Refer to Figure 7.4. The marginal product of the fourth worker is

A) 8.
B) 12.5.
C) 48.
D) 92.

Question 76

When total product is maximized, marginal product

A) and average product are zero.
B) is positive, but average product is zero.
C) is zero, but average product is positive.
D) and average product are positive.

Question 77

Refer to the information provided in Figure 7.6 below to answer the questions that follow. Figure 7.6
Refer to Figure 7.6. The shoe manufacturer currently produces 50 units of output. If this shoe manufacturer increases labor from 15 to 20, the marginal product of the 20th worker

A) is zero, as the total number of shoes produced remains at 50.
B) is 8.5, as capital can be reduced by 8.5 units when the 20th worker is hired.
C) cannot be determined because output remains constant.
D) cannot be determined because both capital and labor have been increased.

Question 78

If diminishing marginal returns have already set in for The Picture Perfect Framing Store and the marginal product of the fifth picture framer is 20, then the marginal product of the sixth picture framer must be

A) negative.
B) zero.
C) less than 20.
D) greater than 20.

Question 79

Refer to the information provided in Figure 7.5 below to answer the questions that follow. Figure 7.5
Refer to Figure 7.5. Diminishing marginal returns set in after the ________ worker is hired.

A) first
B) fifth
C) eighth
D) sixteenth

Question 80

Firms have an incentive to substitute labor for capital as the

A) price of capital increases.
B) price of capital decreases.
C) price of labor increases.
D) marginal product of labor decreases.