Deck 8: Production Technology and Cost

Question 1

Additional Application
Do implicit costs affect decision-making in the real world? For the first time nationwide the number of golf courses closing in a year will exceed the number that is opening.This can be explained by a number of reasons.One is the cost of insuring golf courses,which has increased in many areas.Also the number of rounds played has decreased 4% in the last six years.But another explanation is the opportunity cost of owning a golf course.As property prices have increased,the land that golf courses are on is worth a great deal more as housing developments.The owners must continually decide whether the return from operating a golf course is greater than,or at least equal to,the return the owners could get if the land was developed for another use.Furthermore,one explanation for the decline in rounds being played is attributed to the time it takes to play golf.As the opportunity cost of a golfer's time increases,the fewer hours he/she is willing to spend on the golf course.Implicit costs are real and play a role in decision-making of both supply and demand.
"Blues on the Green: Why Golf is in Decline," The Economist,October 14,2006,p.70.
If the owners of a golf course only include their explicit costs when they calculate their annual profit:

A)their economic profit will be greater than their accounting profit.
B)their economic profit will be equal to their accounting profit.
C)their economic profit will be less than their accounting profit.
D)none of the above will be true.

Answer 1

C

Question 2

Scenario 8.1: Ana used to work for a Advertising agency where she earned a yearly salary of $60,000.She got tired of working for another company so she opened his own Advertising company.Ana now pays her designer $40,000 per year and spends $25,000 for rent and utilities.She earns $120,000 in annual revenue.
Refer to Scenario 8.1.Ana's accounting profit is:

A)$65,000.
B)$55,000.
C)$5,000.
D)$120,000.

Answer 2

B

Question 3

Table 8.1
Refer to Table 8.1.Suppose Mr.B withdrew $50,000 from his account that earned 10% to invest into this business.He quit his full-time job that paid $40,000 to manage this business.Mr.B's implicit cost equals:

A)$100,000.
B)$90,000.
C)$50,000.
D)45,000.

Answer 3

D

Question 4

Sarah has a savings account with a $1000 balance that earns 3% APY.She decides to withdraw the entire balance to buy a laptop computer,what will be her opportunity if her buying the laptop?

A)the cost of the laptop
B)the forgone interest
C)the forgone interest and the cost of the laptop
D)the cost of the laptop minus the forgone interest

Question 5

Economic costs are measured by all monetary payments.

Question 6

Additional Application
Do implicit costs affect decision-making in the real world? For the first time nationwide the number of golf courses closing in a year will exceed the number that is opening.This can be explained by a number of reasons.One is the cost of insuring golf courses,which has increased in many areas.Also the number of rounds played has decreased 4% in the last six years.But another explanation is the opportunity cost of owning a golf course.As property prices have increased,the land that golf courses are on is worth a great deal more as housing developments.The owners must continually decide whether the return from operating a golf course is greater than,or at least equal to,the return the owners could get if the land was developed for another use.Furthermore,one explanation for the decline in rounds being played is attributed to the time it takes to play golf.As the opportunity cost of a golfer's time increases,the fewer hours he/she is willing to spend on the golf course.Implicit costs are real and play a role in decision-making of both supply and demand.
"Blues on the Green: Why Golf is in Decline," The Economist,October 14,2006,p.70.
Which of the following would be an implicit cost of playing a round of golf?

A)the value of meeting new friends or improving business relationships
B)the value of another activity the golfer could be doing
C)the cost of property insurance;the value of fresh air and exercise for five hours
D)the value of competition and improving your skill level

Question 7

Mario has a company that produces plastic freezer bags.His company objective is to maximize:

A)his company's revenues.
B)his company's total out-of-pocket costs.
C)his company's opportunity costs of each factor of production.
D)his company's economic profits,the difference between total revenue and total cost.

Question 8

Table 8.1
Refer to Table 8.1.Suppose Mr.B withdrew $50,000 from his account that earned 10% to invest into this business.He quit his full-time job that paid $40,000 to manage this business.Mr.B's economic profit equals:

A)$100,000.
B)$45,000.
C)$0.
D)-$45,000.

Question 9

Table 8.1
Which of the following situations describes a short-run adjustment of a firm to changing business conditions?

A)A doctor increases the size of his waiting room.
B)A manager calls in two part-time workers to prepare for the holiday rush.
C)A rancher sells some of his land.
D)A manufacturing firm expands its production facility.

Question 10

A firm's objective is to maximize its economic profit,which is:

A)total revenue minus economic cost.
B)total profit minus total cost.
C)economic cost minus profit.
D)economic cost minus total revenue.

Question 11

Scenario 8.1: Ana used to work for a Advertising agency where she earned a yearly salary of $60,000.She got tired of working for another company so she opened his own Advertising company.Ana now pays her designer $40,000 per year and spends $25,000 for rent and utilities.She earns $120,000 in annual revenue.
Refer to Scenario 8.1.What is Ana's explicit cost?

A)$65,000
B)$55,000
C)$45,000
D)$35,000

Question 12

You own a building that has four possible uses: an Internet cafe,a coffee store,an ice cream 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 an ice cream store.The opportunity cost of using this building for an ice cream store is:

A)$2,000,the value if the building is used as an Internet cafe.
B)$3,000,the value if the building is used as a coffee store.
C)$3,333,the average of the values if the building is used for either an Internet cafe,a coffee store,or a bookstore.
D)$5,000,the value if the building is used for a bookstore.

Question 13

You are the owner and only employee of a company that repairs computers.Last year,you earned total revenues of $75,000.Your costs for equipment,rent,and supplies were $10,000.To start this business you quit a job at another computer software firm that paid $40,000 a year.Last year,your economic profits were:

A)$100,000.
B)$75,000.
C)$50,000.
D)$25,000.

Question 14

Scenario 8.1: Ana used to work for a Advertising agency where she earned a yearly salary of $60,000.She got tired of working for another company so she opened his own Advertising company.Ana now pays her designer $40,000 per year and spends $25,000 for rent and utilities.She earns $120,000 in annual revenue.
Refer to Scenario 8.1.Ana's opportunity cost of running her own business is:

A)$30,000.
B)$60,000.
C)$65,000.
D)$120,000.

Question 15

Table 8.1
Refer to Table 8.1.Suppose Mr.B withdrew $50,000 from his account that earned 10% to invest into this business.He quit his full-time job that paid $40,000 to manage this business.If Mr.B is excited about his $45,000 profit,an economist would:

A)celebrate with him.
B)mention the $90,000 he has given up.
C)tell him his economic profit is indeed positive but not as big as $45,000.
D)tell him he made zero economic profit.

Question 16

Additional Application
Do implicit costs affect decision-making in the real world? For the first time nationwide the number of golf courses closing in a year will exceed the number that is opening.This can be explained by a number of reasons.One is the cost of insuring golf courses,which has increased in many areas.Also the number of rounds played has decreased 4% in the last six years.But another explanation is the opportunity cost of owning a golf course.As property prices have increased,the land that golf courses are on is worth a great deal more as housing developments.The owners must continually decide whether the return from operating a golf course is greater than,or at least equal to,the return the owners could get if the land was developed for another use.Furthermore,one explanation for the decline in rounds being played is attributed to the time it takes to play golf.As the opportunity cost of a golfer's time increases,the fewer hours he/she is willing to spend on the golf course.Implicit costs are real and play a role in decision-making of both supply and demand.
"Blues on the Green: Why Golf is in Decline," The Economist,October 14,2006,p.70.
Which of the following would be an implicit cost of operating a golf course?

A)the cost of fertilizers and water
B)the cost of groundskeepers
C)the cost of property insurance
D)the cost of not developing houses on the property

Question 17

Scenario 8.1: Ana used to work for a Advertising agency where she earned a yearly salary of $60,000.She got tired of working for another company so she opened his own Advertising company.Ana now pays her designer $40,000 per year and spends $25,000 for rent and utilities.She earns $120,000 in annual revenue.
Refer to Scenario 8.1.Ana's economic profit is:

A)-$55,000.
B)-$15,000.
C)-$5,000.
D)-$120,000.

Question 18

You are the owner and only employee of a company that repairs computers.Last year,you earned total revenues of $75,000.Your costs for equipment,rent,and supplies were $10,000.To start this business you quit a job at another computer software firm that paid $40,000 a year.During the year,your economic costs were:

A)$10,000.
B)$40,000.
C)$50,000.
D)$75,000.

Question 19

Total economic costs include:

A)a normal rate of return.
B)out-of-pocket costs.
C)opportunity costs of all inputs.
D)all of the above

Question 20

Dan is an entrepreneur who invests in commercial and residential real estate.He has a savings account with $100,000 that earns 1% APY.Dan wants to buy a house that will give him a monthly cash inflow of $200.What will opportunity cost of investing in the house be?

A)1000
B)1200
C)800
D)200

Question 21

Refer to Figure 8.2.The marginal product of the fifth worker is ________.

A)one
B)five
C)eight
D)ten

Question 22

Economic profits are determined by subtracting total revenue and implicit costs.

Question 23

Refer to Figure 8.2.The marginal product of the sixth worker is ________.

A)0
B)5
C)-5
D)50

Question 24

Accounting costs include all monetary payments and all the opportunity cost of inputs that do not require an explicit monetary payment.

Question 25

The period of time when a firm is unable to change all of inputs,or factors of production,is called the:

A)economic term.
B)short run.
C)accounting term.
D)long run.

Question 26

Refer to Figure 8.1.The lawn mower company's total-product curve shows the following:

A)the effects of labor specialization.
B)the effects of diminishing returns.
C)the effects of labor specialization and diminishing returns.
D)none of the above.

Question 27

Refer to Figure 8.2.Diminishing marginal returns set in after the ________ worker is hired.

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

Question 28

Economic costs include only the implicit costs to a firm.

Question 29

Table 8.2
Mitzi's Pet Salon hires you to determine the company's status.The data in Table 8.2 provides information on the company's annual costs and revenues.Mitzi spends at least 40 hours a week at her place of business.If she closed the salon,she could work for her competitor and earn $15,000 per year.She also owns the building that houses the salon and could rent it out for $18,000 per year if she closes her business.Calculate the economic cost and economic profit for Mitzi's Pet Salon.Would an accountant come to the same conclusion about the profitability of this firm? Explain.

Question 30

At Carolina's Bakery,the marginal products of the first,second,third,and fourth workers are 15,11,8,and 6 cakes produced respectively.The total product of the first three workers is:

A)8.
B)15.
C)34.
D)42.

Question 31

Refer to Figure 8.2.The marginal product of the third worker is ________.

A)forty-two
B)thirty-two
C)twelve
D)ten

Question 32

A firm's accounting cost is always higher than its economic cost.

Question 33

When El Guapo's Mexican Restaurant hires one waiter,5 tables can be served in an hour.When El Guapo's Mexican Restaurant hires two waiters,12 tables can be served in an hour.The marginal product of labor of the second waiter is ________ tables served per hour.

A)5
B)7
C)12
D)17

Question 34

Jimmy was working for an accounting firm earning $30,000 per year.He has $100,000 in an investment account earning 10% per year.If he decided to invest the $100,000 in a new business and quit his job to work full-time at this new business,what is his implicit cost of this new business?

Question 35

Accounting costs include explicit and implicit costs.

Question 36

The short run can be defined as any period of time:

A)less than one year.
B)in which some inputs are fixed.
C)in which all inputs are variable.
D)in which price is fixed.

Question 37

Your friend Harry has quit his $20,000-a-year job to start a business that rents fishing boats.He asks you to lend him $50,000 and agrees to pay you a 10% return on your $50,000 if he earns a profit.During the first year Harry's total revenue is $120,000 and his total cost for equipment and supplies are $100,000.Harry tells you that he cannot pay you any interest this year because he did not earn a profit.Is your friend Harry trying to cheat you?

Question 38

Explain the difference between accounting costs and economic costs.

Question 39

The opportunity cost of an entrepreneur's time is an explicit cost.

Question 40

Refer to Figure 8.1.The marginal product of the second worker is ________ lawns moved.

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

Question 41

Table 8.3
Refer to Table 8.3.The firm will experience diminishing marginal returns to labor as long it hires more than:

A)0 units of labor.
B)1 unit of labor.
C)2 units of labor.
D)3 units of labor.

Question 42

If marginal product is negative,then:

A)total product will decrease if more of the input is hired.
B)total product is equal to zero.
C)marginal product will increase if more of the input is hired.
D)average product will increase if more of the input is hired.

Question 43

Which type of cost always increases immediately when output increases?

A)fixed costs
B)overhead costs
C)total variable costs
D)sunk costs

Question 44

Which of the following is a reason why the marginal product increases as output increases:

A)decreasing repetition.
B)increasing continuity.
C)both A and B
D)neither A nor B

Question 45

Raphael's Salon has $5,000 in fixed cost and $15,000 in variable costs monthly.Raphael's Salon gives 1500 hair cuts a month.What is the average total cost for Raphael's Salon?

A)8
B)7
C)0.075
D)13.33

Question 46

Which of the following statements about fixed costs is correct?

A)Fixed costs are not opportunity costs.
B)Fixed costs must be paid even if the firm's output is zero.
C)Fixed costs are always the largest portion of total costs.
D)none of the above

Question 47

Which of the following is most likely to be a variable cost for a firm?

A)the interest payments made on equipment loans
B)an annual payment for insurance on the firm's plant
C)the monthly rent on office space that it leased for 5 years
D)the payments made to match workers' 401K contributions

Question 48

Suppose that at Pollo Loco's Restaurant 5 cooks can make 70 meals.Assuming that there are diminishing returns to labor,it will require ________ to make 70 more meals.

A)an additional 5 cooks
B)more than an additional 5 cooks
C)less than an additional 5 cooks
D)a total of 10 cooks

Question 49

Total variable cost:

A)increases as output increases.
B)is constant as output increases.
C)decreases as output increases.
D)is lowest for labor-intensive technologies.

Question 50

A fixed cost can be thought of as:

A)a cost that changes as output increases.
B)a cost that must be paid even if output equals zero.
C)a cost that is paid only when output equals zero.
D)total costs ignoring opportunity costs.

Question 51

Refer to Figure 8.3.The vertical distance AB represents:

A)total fixed costs.
B)marginal costs.
C)average fixed costs.
D)average total costs.

Question 52

Dan owns a factory that manufactures smartphones.He has a lot of costs every month to keep his factory running.Which of the following is one of Dan's fixed costs?

A)plastic used to make the smartphones
B)his electricity bill for the factory
C)his mortgage on the factory
D)memory devices used to store music and video on the smartphones

Question 53

Short-run costs that depend on the level of output are:

A)total fixed cost only.
B)total variable costs only.
C)total costs only.
D)both total variable costs and total costs.

Question 54

A residential cleaning company has total costs of $45,000 and total variable costs of $25,000.The cleaning company has total fixed costs that equal to:

A)$45,000.
B)$20,000.
C)$70,000.
D)indeterminate because the firm's output level is not known.

Question 55

Refer to Figure 8.3.Micro Oven's total fixed costs are:

A)$0.
B)$200.
C)$500.
D)indeterminate from this information.

Question 56

Table 8.3
Refer to Table 8.3.If four workers are hired,then:

A)diminishing marginal returns have started.
B)marginal product equals five.
C)total product is maximized on the table.
D)all of the above

Question 57

If the price of a fixed factor of production increases,then:

A)total costs are unchanged.
B)marginal costs will increase.
C)variable costs are unchanged.
D)variable costs will increase.

Question 58

Refer to Figure 8.3.If two microwave ovens are produced,Micro Oven's total variable costs are:

A)$350.
B)$425.
C)$500.
D)indeterminate from this information.

Question 59

A firm's short-run total cost (TC)is equal to:

A)fixed costs plus variable costs.
B)variable cost minus total cost.
C)total cost divided by variable cost.
D)fixed cost minus variable cost.

Question 60

Table 8.3
Refer to Table 8.3.If the firm hires seven workers,then:

A)marginal product is negative.
B)marginal product is less than one.
C)total product is negative.
D)marginal product is equal to three.

Question 61

Marginal cost:

A)is the increase in total cost resulting from producing one more unit of output.
B)is the average cost of production divided by output.
C)equals the increase in average variable cost resulting from producing one more unit of output.
D)always equals average cost.

Question 62

Table 8.5
Refer to Table 8.5.If Sherry produces zero earrings,her total fixed costs are:

A)$0.
B)$50.
C)$100.
D)indeterminate from this information.

Question 63

Table 8.4
Refer to Table 8.4.When the fifth worker is employed,the marginal cost is:

A)$150.
B)$100.
C)$15.
D)$10.

Question 64

As output increases,average fixed costs:

A)decrease.
B)initially decrease and then increase.
C)remain constant.
D)increase.

Question 65

Refer to Figure 8.4.The marginal cost of the 10th basketball is:

A)$2.
B)$30.
C)$28.
D)$1.

Question 66

Table 8.4
Refer to Table 8.4.There are diminishing returns to labor for:

A)all workers.
B)workers 1 and 2 only.
C)workers 4 through 5 only.
D)worker 1 only.

Question 67

Marginal costs typically:

A)increase as output increases.
B)decrease as output increases.
C)first increase then decrease as output increases.
D)first decrease then increase as output increases.

Question 68

If Mayo Lawyer Firm's total costs are $7000 when 20 clients' cases are worked and $7600 when 21 clients' cases are worked,the marginal cost of the 21st client's case is:

A)$300.
B)$400.
C)$500.
D)$600.

Question 69

Tom's landscaping service has only one variable input which is labor.Tom's landscaping service labor costs are $300 a day and Tom's landscaping service does 9 yards per day.To do 10 yards per day,Tom's landscaping service labor costs increase to $325 a day.The marginal cost of doing that 10th yard is:

A)$25.
B)$32.5.
C)$45.
D)indeterminate from the information given.

Question 70

Refer to Figure 8.6.The total fixed costs for Cyndy's Floral Arrangements are $1,000.If Cyndy's Floral Arrangements produces 200 silk flower arrangements,the average fixed costs are:

A)$.20.
B)$5.
C)$20.
D)$200.

Question 71

A firm will begin to experience diminishing returns at the point where:

A)marginal cost increases.
B)marginal cost decreases.
C)marginal product increases.
D)both B and C

Question 72

Marginal cost is equal to:

A)variable cost divided by output.
B)output divided by variable cost.
C)the change in output divided by the change in variable cost.
D)the change in variable cost divided by the change in output.

Question 73

At Fresh Hot Bakery,the average cost of making 20 baguettes is $1.00.The average cost of making 21 baguettes is $1.10.The marginal cost of the 21st baguettes is:

A)$0.10.
B)$2.10.
C)$3.00.
D)$3.10.

Question 74

Table 8.4
Refer to Table 8.4.When the second worker is hired,the marginal cost is equal to:

A)$2.
B)$3.
C)$6.
D)$50.

Question 75

The law of diminishing returns applies in the:

A)short run and the long run.
B)long run but not the short run.
C)short run only.
D)long run only.

Question 76

As output increases,total cost also increases.Therefore:

A)marginal cost is increasing.
B)marginal cost is positive.
C)average fixed costs are increasing.
D)all of the above

Question 77

For small quantities of output,average variable cost decreases as output increases due to:

A)a reduction in the number of workers.
B)diminishing return.
C)labor specialization increases worker productivity.
D)More information is needed to determine.

Question 78

Refer to Figure 8.5.The marginal cost of the third oven is:

A)$100.
B)$150.
C)$50.
D)indeterminate from this information.

Question 79

As output increases,it is always true that:

A)average total cost decreases.
B)average variable cost is above marginal cost.
C)average fixed costs decrease.
D)total fixed costs increase.

Question 80

Table 8.4
Refer to Table 8.4.Three workers can produce ________ cakes per day at a total cost of ________.

A)90;350
B)90;$50
C)90;$550
D)90;$750