Deck 8: Business Costs and Production

Question 1

Accountants consider only explicit costs when measuring accounting profit. The reason that they ignore implicit costs is that:

A) implicit costs are typically very small.
B) explicit costs are always greater than implicit costs.
C) implicit costs are not out-of-pocket expenses.
D) implicit costs are tax deductible.
E) implicit costs cannot be measured in terms of dollars.

Answer 1

C

Question 2

Total revenue minus total cost is equal to:

A) producer surplus.
B) dividends.
C) consumer surplus.
D) profit.
E) retained earnings.

Answer 2

D

Question 3

Which of the following is true about explicit costs?

A) They are the opportunity costs of production.
B) They are out-of-pocket expenses.
C) They are not measured in terms of dollars.
D) They are not included when measuring economic profit.
E) They are not included when measuring accounting profit.

Answer 3

B

Question 4

Lauren is the owner of a bakery that earns 0 (zero) economic profit. Last year, her total revenue was $145,000, her rent was $12,000, her labor costs were $65,000, and her overhead expenses were $15,000. From this information, we know that her total implicit costs were:

A) $145,000.
B) $53,000.
C) $92,000.
D) $65.000.
E) $15,000.

Question 5

Explicit costs are:

A) the opportunity cost of the means of production.
B) always paid out of pocket.
C) always greater than implicit costs.
D) never greater than implicit costs.
E) what a business sacrifices in order to produce a good.

Question 6

The out-of-pocket expenses incurred in producing a good are also known as:

A) implicit costs.
B) fiduciary costs.
C) explicit costs.
D) capital costs.
E) wages and prices.

Question 7

Implicit costs can be difficult to measure because:

A) business owners cannot always observe them directly.
B) they are not measured in dollars.
C) they are always very expensive.
D) they are always greater than explicit costs.
E) they include expenses like taxes.

Question 8

A firm's decisions are ultimately oriented toward:

A) minimizing the number of employees it hires.
B) maximizing profit.
C) maximizing production.
D) increasing total revenue.
E) negotiating better deals with suppliers.

Question 9

Economists consider both explicit and implicit costs when measuring economic profit. The reason they consider implicit costs is that:

A) they are more conservative than accountants, who consider only accounting costs.
B) most businesses forget to pay their implicit costs.
C) a business must cover its opportunity costs as well as its out-of-pocket expenses to be truly profitable.
D) implicit costs are typically far larger than explicit costs.
E) implicit costs include expenses like taxes and fees to the government.

Question 10

Lauren is the owner of a bakery that earns 0 (zero) economic profit. Last year, her total revenue was $145,000, her rent was $12,000, her labor costs were $65,000, and her overhead expenses were $15,000. From this information, we know that her total explicit costs were:

A) $80,000.
B) $92,000.
C) $15,000.
D) $77,000.
E) $53,000.

Question 11

If a firm wants to cut its costs through more efficient production, we should assume that the firm is trying to:

A) fire its employees.
B) increase its profits.
C) eliminate its competition.
D) buy back its stock.
E) gain control over its market.

Question 12

Chief executive officers (CEOs) of major corporations are often paid mostly with stock options, as opposed to salaries and cash payments. These stock options often cannot be converted into stock and sold until years after they were issued. All this is ultimately intended to create incentives for the CEO to:

A) leave the company after a year or so.
B) lay off as many employees as possible.
C) increase the value of the stock by maximizing company profit.
D) outsource all production to other countries.
E) lobby Congress for subsidies and tax breaks.

Question 13

Implicit costs are:

A) the opportunity cost of the means of production.
B) always paid out of pocket.
C) never greater than explicit costs.
D) always greater than explicit costs.
E) not measured in terms of dollars.

Question 14

If a firm has total costs of $535,000 and its implicit costs are $165,000, how much are its explicit costs?

A) $3,242
B) $120,000
C) $370,000
D) $700,000
E) $308

Question 15

Ralph owns a small pizza restaurant, where he works full-time in the kitchen. His total revenue last year was $100,000, and his rent was $3,000 per month. He pays his one employee $2,000 per month, and the cost of ingredients and overhead averages $500 per month. Ralph could earn $35,000 per year as the manager of a competing pizza restaurant nearby. His total explicit costs for the year were:

A) $24,000.
B) $6,000.
C) $60,000.
D) $66,000.
E) $72,000.

Question 16

In economics, we assume that firms make decisions in order to:

A) maximize profit.
B) minimize revenues.
C) evade taxes.
D) lobby officials.
E) protect the environment.

Question 17

Ralph owns a small pizza restaurant, where he works full-time in the kitchen. His total revenue last year was $100,000, and his rent was $3,000 per month. He pays his one employee $2,000 per month, and the cost of ingredients and overhead averages $500 per month. Ralph could earn $35,000 per year as the manager of a competing pizza restaurant nearby. His total implicit costs for the year were:

A) $100,000.
B) $35,000.
C) $60,000.
D) $66,000.
E) $72,000.

Question 18

An explicit cost for a business that manufactures bicycles would be the:

A) value of the products that the firm's employees could produce at another company.
B) salary that the owner of the business could earn elsewhere.
C) goods and services provided by the government with the taxes the firm pays.
D) wages paid to employees.
E) various products that could be made with the steel used to make bicycles.

Question 19

Every year the U.S. sugar industry, which is dominated by only a few firms, spends millions of dollars lobbying members of Congress and contributing to their reelection campaigns. It does so for both Democrats and Republicans. One goal of these contributions is the preservation of the U.S. sugar quota, which limits the importation of less expensive sugar from other countries. Ultimately, all of these activities are motivated by a desire among U.S. sugar producers to:

A) keep their prices as low as possible.
B) make the market for sugar as competitive as possible.
C) support one political party but not another.
D) keep their profits as high as possible.
E) hire as many employees as they can.

Question 20

If a firm generates $240,000 in revenue, earns $120,000 in economic profit, and its explicit costs are $80,000, how much are its implicit costs?

A) $160,000
B) $80,000
C) $40,000
D) $60,000
E) $120,000

Question 21

The production function of a restaurant includes items such as labor (i.e., cooks, waiters, a manager), capital (i.e., ovens, counters, tables, chairs, and a building), and land. In the short run, the owner of the restaurant will optimize production by employing a variable amount of _________ given a fixed amount of _________.

A) capital; labor and land
B) land; capital and labor
C) labor; capital and land
D) labor; capital and raw materials
E) land; labor and raw materials

Question 22

A firm's inputs are also known as its:

A) outputs.
B) profits.
C) factors of production.
D) revenues.
E) costs.

Question 23

A firm's economic profit is always less than its accounting profit because:

A) accounting profit considers explicit costs, which economic profit does not.
B) economic profit considers implicit costs, which accounting profit does not.
C) economic profit is always zero, no matter what kind of firm it is.
D) accounting profit considers implicit costs, which economic profit does not.
E) accounting profit is always positive, no matter what kind of firm it is.

Question 24

If you were told that a firm earns positive accounting profit and nothing else, what would you know is true about its economic profit?

A) It is positive because whenever accounting profit is positive, so is economic profit.
B) It cannot be determined without knowing the firm's implicit costs.
C) It is zero because all firms earn zero economic profit regardless of the industry.
D) It is equal to its accounting profit.
E) It is negative because its accounting profit is probably not high enough to earn positive economic profit.

Question 25

Lauren is the owner of a bakery. Last year, her total revenue was $145,000, her rent was $12,000, her labor costs were $65,000, and her overhead expenses were $15,000. From this information, we know that her accounting profit was:

A) $145,000.
B) $53,000.
C) $65,000.
D) $15,000.
E) $27,000.

Question 26

A firm has a certain amount of capital and land. As it hires more labor, each worker is able to:

A) earn a higher wage.
B) specialize.
C) work more overtime.
D) purchase more capital.
E) purchase more land.

Question 27

Accounting profit is equal to:

A) total revenue minus explicit costs.
B) total revenue minus implicit costs.
C) explicit costs plus implicit costs.
D) explicit costs minus implicit costs.
E) total revenue minus implicit costs and explicit costs.

Question 28

Accounting profit ignores which of the following costs?

A) implicit costs
B) labor costs
C) capital costs
D) taxes paid
E) explicit costs

Question 29

Ralph owns a small pizza restaurant, where he works full-time in the kitchen. His total revenue last year was $100,000, and his rent was $3,000 per month. He pays his one employee $2,000 per month, and the cost of ingredients and overhead averages $500 per month. Ralph could earn $35,000 per year as the manager of a competing pizza restaurant nearby. His total accounting profit for the year was:

A) −$1,000.
B) $100,000.
C) $72,000.
D) $34,000.
E) $35,000.

Question 30

Lauren is the owner of a bakery. Last year, her total revenue was $145,000, her rent was $12,000, her labor costs were $65,000, and her overhead expenses were $15,000. If she could earn $53,000 working for another bakery nearby, we know that her economic profit was:

A) $145,000.
B) $53,000.
C) $12,000.
D) $0.00.
E) $15,000.

Question 31

Darrell is the owner of a furniture store. Last year, his total revenue was $525,000 and his total labor costs were $200,000. His overhead expenses, including insurance and legal fees, were $175,000. The rent on his building was $45,000. Darrell could earn $105,000 per year working at a nearby furniture distributor. If his total revenue increases to $600,000 this year and all of his other expenses are held constant, we know that his economic profit is now:

A) $75,000.
B) $600,000.
C) $0.00.
D) $105,000.
E) $200,000.

Question 32

The three primary factors of production are:

A) revenue, profits, and costs.
B) price, quantity, and profits.
C) capital, interest, and savings.
D) labor, wages, and training.
E) land, labor, and capital.

Question 33

As a firm hires more labor and each worker is able to specialize, what happens to each additional worker's marginal productivity?

A) It increases at first, then decreases.
B) It increases continuously.
C) It decreases continuously.
D) It decreases at first, then increases.
E) It remains constant, no matter how much labor is hired.

Question 34

Ralph owns a small pizza restaurant, where he works full-time in the kitchen. His total revenue last year was $100,000, and his rent was $3,000 per month. He pays his one employee $2,000 per month, and the cost of ingredients and overhead averages $500 per month. Ralph could earn $35,000 per year as the manager of a competing pizza restaurant nearby. His total economic profit for the year was:

A) $34,000.
B) −$1,000.
C) $20,000.
D) $65,000.
E) −$35,000.

Question 35

A firm's production function is similar to a recipe used to make a cake in the sense that the production function shows us the combination of _________ used to produce __________.

A) inputs; output
B) outputs; input
C) costs; profit
D) expenses; revenue
E) taxes; deductions

Question 36

The three primary inputs are:

A) revenue, profits, and costs.
B) price, quantity, and profits.
C) land, labor, and capital.
D) labor, wages, and training.
E) capital, interest, and savings.

Question 37

Another term for factors of production is:

A) outputs.
B) inputs.
C) profits.
D) revenues.
E) costs.

Question 38

A firm's accounting profit is always greater than its economic profit because:

A) economic profit considers implicit costs, which accounting profit does not.
B) accounting profit considers explicit costs, which economic profit does not.
C) economic profit is always zero, no matter what kind of firm it is.
D) accounting profit considers implicit costs, which economic profit does not.
E) accounting profit is always positive, no matter what kind of firm it is.

Question 39

Economic profit is equal to:

A) total revenue minus explicit costs.
B) total revenue minus implicit costs.
C) explicit costs plus implicit costs.
D) total revenue minus implicit costs and explicit costs.
E) explicit costs minus implicit costs.

Question 40

Darrell is the owner of a furniture store. Last year, his total revenue was $525,000 and his total labor costs were $200,000. His overhead expenses, including insurance and legal fees, were $175,000. The rent on his building was $45,000. Darrell could earn $105,000 per year working at a nearby furniture distributor. From this information, we know that his accounting profit was:

A) $525,000.
B) $375,000.
C) $150,000.
D) $175,000.
E) $105,000.

Question 41

In the accompanying table, diminishing marginal product begins after the: $\begin{array}{r}\text { input }&\text { Total Product }\\0&0\\1&10\\2&35\\3&70\\4&120\\5&165\\5&175\\7&170\\8&155\end{array}$

A) first unit of input.
B) second unit of input.
C) seventh unit of input.
D) fourth unit of input.
E) sixth unit of input.

Question 42

If a firm hires another worker and her marginal product of labor is 0 (zero), we know that the firm's total output is:

A) 0 (zero).
B) unchanged.
C) increasing.
D) decreasing.
E) equal to the marginal product of that worker.

Question 43

The production function for bookshelves includes:

A) yeast, flour, pans, ovens, and bakers.
B) electric guitars, drums, microphones, musicians, and a stage.
C) foam cushions, fabric, wood, nails, and furniture makers.
D) wood, nails, carpenters, saws, and hammers.
E) wool fabric, buttons, a zipper, a sewing machine, and a tailor.

Question 44

Based on the accompanying graph, is this firm earning positive, negative, or zero economic profits?

A) We cannot determine the firm's level of profit because we do not know about its revenues.
B) It is earning positive economic profit.
C) Because this is the short run, all firms earn positive economic profit.
D) It is earning zero economic profit.
E) It is earning negative economic profit.

Question 45

If there are gains from specialization in a workplace, hiring another employee means that the marginal product of labor will:

A) decrease.
B) remain the same.
C) increase.
D) be 0 (zero).
E) be negative.

Question 46

If a firm hires another worker and her marginal product of labor is positive, we know that the firm's total output is:

A) decreasing.
B) unchanged.
C) increasing.
D) 0 (zero).
E) equal to the marginal product of that worker.

Question 47

If a firm hires another worker and her marginal product of labor is negative, we know that the firm's total output is:

A) increasing.
B) decreasing.
C) equal to the marginal product of that worker.
D) unchanged.
E) 0 (zero).

Question 48

If the marginal product of labor for a firm decreases as more workers are hired, we know that:

A) all workers are paid the same wage.
B) the marginal cost of producing output is decreasing.
C) the gains from specialization are exhausted.
D) the marginal cost of producing output is constant.
E) there are still gains from specialization left to be exploited.

Question 49

Lauren owns a bakery that produces, among other things, wedding cakes. She currently has 6 employees; with 6 employees, her bakery can produce 9 wedding cakes per day. If she hired a seventh employee, she'd be able to produce 12 wedding cakes per day. Therefore, the marginal product of the seventh employee is __________ wedding cakes.

A) 9
B) 7
C) 1.71
D) 3
E) 5

Question 50

Lauren owns a bakery that produces, among other things, wedding cakes. She currently has 7 employees; with 7 employees, her bakery can produce 12 wedding cakes per day. If she hired an eighth employee, she'd be able to produce 16 wedding cakes per day. Therefore, the marginal product of the eighth employee is _________ wedding cake(s).

A) 2
B) 1
C) 8
D) 16
E) 4

Question 51

Marginal product is the change in:

A) total output divided by the change in input.
B) total output plus the change in input.
C) total output minus the change in input.
D) total output times the change in input.
E) input divided by the change in total output.

Question 52

When a firm hires another employee and, as a result, total output increases, this change in total output is also known as:

A) total output.
B) marginal employment.
C) marginal product.
D) labor contribution.
E) marginal benefit.

Question 53

Assume that a firm hires an additional employee. If the marginal product for that employee is greater than for the previous employee hired, it must be because:

A) the marginal product of labor is diminishing.
B) all workers are paid the same wage.
C) the workers all perform the exact same set of tasks.
D) there are gains from specialization.
E) all workers are not paid the same wage.

Question 54

Lauren owns a bakery that produces, among other things, wedding cakes. She currently has 5 employees; with 5 employees, her bakery can produce 7 wedding cakes per day. If she hired a sixth employee, she'd be able to produce 9 wedding cakes per day. Therefore, the marginal product of the sixth employee is _________ wedding cake(s).

A) 5
B) 7
C) 9
D) 2
E) 1.5

Question 55

The change in total output divided by the change in input is known as:

A) marginal product.
B) marginal cost.
C) specialization.
D) total product.
E) marginal profit.

Question 56

In the accompanying table, diminishing marginal product begins after the: $\begin{array}{rr}\text {output }&\text { Total Product }\\0&-\\1 & 3 \\2 & 8 \\3 & 10 \\4 & 6 \\5 & -1 \\6 & -9\end{array}$

A) second unit of output.
B) fourth unit of output.
C) fifth unit of output.
D) third unit of output.
E) first unit of output.

Question 57

If all workers are able to specialize and become more productive as more labor is hired, the amount of total output produced:

A) increases at a decreasing rate.
B) increases at a constant rate.
C) increases at an increasing rate.
D) decreases at an increasing rate.
E) decreases at a constant rate.

Question 58

The production function for automobiles includes:

A) farmland, seeds, rain, and tractors.
B) an aircraft carrier, planes, helicopters, sailors, and pilots.
C) a mall, racks and shelves, mannequins, and sales clerks.
D) lumber, shingles, windows, doors, and carpenters.
E) a factory, an assembly line, workers, and robots.

Question 59

As a firm hires more workers, its marginal product of labor increases only if:

A) each worker does the same tasks as all others.
B) all workers are paid the same wage.
C) the firm produces commodities.
D) employees are assigned specialized tasks.
E) all workers are paid different wages.

Question 60

If workers are unable to specialize and become more productive as more labor is hired, the amount of total output produced:

A) increases at an increasing rate.
B) increases at a constant rate.
C) increases at a decreasing rate.
D) decreases at an increasing rate.
E) decreases at a constant rate.

Question 61

Which of the following can we learn by looking at a firm's short-run costs?

A) the profit-maximizing level of output
B) whether the firm will experience economies of scale
C) the optimal number of employees to hire
D) whether the firm is earning economic profit
E) the cost-minimizing level of output

Question 62

Steve owns a bike store. His total costs are $1.2 million per year, and his variable costs are $750,000 per year. This means that his fixed costs are:

A) $1.2 million.
B) $750,000.
C) $450,000.
D) $300,000.
E) $1.95 million.

Question 63

Steve owns a bike store. His total costs are $1.2 million per year, and his fixed costs are $450,000 per year. This means that his variable costs are:

A) $1.2 million.
B) $750,000.
C) $450,000.
D) $300,000.
E) $1.65 million.

Question 64

Which of the following costs is fixed in the short run?

A) wages
B) utilities
C) capital
D) raw materials
E) office supplies

Question 65

Audrey owns a horse ranch. Her total costs are $550,000 per year, and her fixed costs are $205,000 per year. This means that her variable costs are:

A) $550,000.
B) $205,000.
C) $345,000.
D) $755,000.
E) $108,000.

Question 66

The average total cost (ATC) and average variable cost (AVC) converge as the level of output produced increases because:

A) the firm is able to purchase more capital and exploit economies of scale.
B) the firm experiences gains in productivity from employee specialization.
C) average total cost decreases as output increases.
D) average fixed cost decreases as output increases.
E) the firm is able to drive its competitors out of business by lowering its price.

Question 67

Use the following scenario to answer the questions:
Steve owns a bike store. His total costs are $1.2 million per year, his variable costs are $750,000, and his fixed costs are $450,000 per year. Last year, Steve sold 1,200 bikes.

-Steve's average variable cost was __________ per bike.

A) $375
B) $625
C) $1,000
D) $2,000
E) $600

Question 68

Use the following scenario to answer the questions:
Steve owns a bike store. His total costs are $1.2 million per year, his variable costs are $750,000, and his fixed costs are $450,000 per year. Last year, Steve sold 1,200 bikes.

-Steve's average total cost was __________ per bike.

A) $625
B) $1,000
C) $375
D) $1,200
E) $600

Question 69

Refer to the accompanying graph to answer the questions:

-If the firm depicted in the graph had to pay higher rent to its landlord, we would expect its _________ curve to shift __________.

A) average total cost (ATC); down
B) average variable cost (AVC); down
C) average total cost (ATC); up
D) marginal cost (MC); up
E) average variable cost (AVC); up

Question 70

Lauren owns a bakery. Her total costs are $150,000 per year, and her fixed costs are $65,000. This means that her variable costs are:

A) $65,000.
B) $150,000.
C) $85,000.
D) $235,000.
E) $70,000.

Question 71

Which of the following is the best example of a variable cost in the short run?

A) rent for an office
B) rent for a restaurant
C) wages for employees
D) debt payments for a loan
E) rent for factory space

Question 72

Darrell owns a furniture store. His total costs are $225,000 per year, and his variable costs are $75,000 per year. This means that his fixed costs are:

A) $75,000.
B) $225,000.
C) $300,000.
D) $50,000.
E) $150,000.

Question 73

The gap between the average total cost (ATC) and average variable cost (AVC) curves represents:

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

Question 74

Economists assume that the cost of _________ is fixed in the short run.

A) labor
B) capital
C) raw materials
D) legal expenses
E) repairs

Question 75

Lauren owns a bakery. Her total costs are $150,000 per year, and her variable costs are $85,000. This means that her fixed costs are:

A) $65,000.
B) $150,000.
C) $85,000.
D) $235,000.
E) $70,000.

Question 76

When output is 100 units, the firm's total fixed cost is $500. What will this firm's total fixed cost be if output doubles to 200 units?

A) $250
B) $500
C) $750
D) $1,000
E) $125

Question 77

In the short run, the cost of ________ is variable, whereas the cost of ________ is fixed.

A) capital; labor
B) electricity; wages
C) capital; raw materials
D) labor; capital
E) raw materials; labor

Question 78

In the short run, average total costs and average variable costs converge as output increases because:

A) marginal cost is below average total cost.
B) marginal cost is below average fixed cost.
C) average fixed costs continually increase.
D) average fixed costs continually decrease.
E) total cost continually increases.

Question 79

Darrell owns a furniture store. His total costs are $225,000 per year, and his fixed costs are $150,000 per year. This means that his variable costs are:

A) $150,000.
B) $225,000.
C) $375,000.
D) $50,000.
E) $75,000.

Question 80

Use the following scenario to answer the questions:
Steve owns a bike store. His total costs are $1.2 million per year, his variable costs are $750,000, and his fixed costs are $450,000 per year. Last year, Steve sold 1,200 bikes.

-Steve's average fixed cost was __________ per bike.

A) $600
B) $625
C) $1,000
D) $2,000
E) $375