Question 1

In economics,maximization of the total profit of an activity occurs when:

Accepted Answer

A)  MB = MC. 
B)  MB > MC. 
C)  MB < MC. 
D)  MB approaches MC.

Question 2

When a person makes a choice that is close to but not exactly the one that leads to the best possible economic outcome,he or she is:

Accepted Answer

A)  making an irrational decision. 
B)  usually ignoring opportunity costs. 
C)  being overconfident. 
D)  operating with bounded rationality.

Question 3

A sunk cost should be ignored in decisions about future actions.

Accepted Answer

A) True 
 B)False

Question 4

When a decision maker chooses the option leading to the outcome that he or she most prefers,he or she has made a _____ decision.

Accepted Answer

A)  irrational 
B)  rational 
C)  profit-maximizing 
D)  loss-minimizing

Question 5

In economics,the assumption is that consumers and firms will make choices that maximize the _____ of each activity.

Accepted Answer

A)  total profit 
B)  total benefit 
C)  sum of total benefit and total cost 
D)  product of total benefit and total cost

Question 6

In cities,a kilometre of road lane may cost $30 million or more,while in rural areas,a kilometre of road lane may cost only $5 million.This means that there should be more road lanes in rural areas than in urban areas.

Accepted Answer

A) True 
 B)False

Question 7

Costs that are included in the economic concept of cost but that are NOT explicit costs are:

Accepted Answer

A)  outlay costs. 
B)  accounting profits. 
C)  implicit costs. 
D)  economic profits.

Question 8

In southern Ontario,the demand for real estate has been increasing rapidly for years.Therefore,the _____ cost of capital is _____ in southern Ontario's peach groves.

Accepted Answer

A)  explicit;decreasing 
B)  implicit;increasing 
C)  implicit;decreasing 
D)  explicit;increasing

Question 9

When making decisions,a person should consider only costs that actually involve an explicit money outlay.This is because such costs actually have to be paid,whereas implicit costs are only notional or hypothetical.

Accepted Answer

A) True 
 B)False

Question 10

Use the following to answer questions :
Scenario: Betty's Cookie Shop
Betty runs a cookie shop where she sells cookies for $1 each.She employs five people,each of whom worked a total of 500 hours last year;she paid them $10 per hour.Her costs of equipment and raw materials add up to $75 000.Her business ability is legendary,and other companies have offered to pay Betty $100 000 to come to work for them.She also knows she could sell her cookie shop for $150 000.The bank in town pays an annual interest rate of 3% on all funds deposited with it.
-If marginal costs remain constant,the marginal cost curve is:

Accepted Answer

A)  vertical. 
B)  horizontal. 
C)  upward-sloping from the origin. 
D)  downward-sloping.

Question 11

Use the following to answer questions :
Scenario: Accounting and Economic Profit
Rather than put the $100 000 that his grandmother left him in a mutual fund that earns 5% each year,Tommy Wang quit his job,which paid $60 000 per year,and started Wang's Wicker Furniture Store.He rented a showroom for $20 000 for the year,purchased $60 000 in wicker furniture,and incurred costs of $40 000 for sales help and advertising.In his first year,his revenue was $150 000.
-(Scenario: Accounting and Economic Profit)Use Scenario: Accounting and Economic Profit.The implicit cost of capital for Wang's Wicker Furniture Store is:

Accepted Answer

A)  $0. 
B)  $2 000. 
C)  $5 000. 
D)  $50 000.

Question 12

If the marginal cost of any activity is constant at $4,then at the optimal quantity of the activity,the marginal benefit will be $4.

Accepted Answer

A) True 
 B)False

Question 13

Star athletes,singers,and actors often start their career very young,forgoing a university education.This is an example of poor decision making since a university education provides benefits that will be invaluable later in their lives.

Accepted Answer

A) True 
 B)False

Question 14

Which statement describes a "how much" decision?

Accepted Answer

A)  Mary is trying to decide whether to go to work or go to university after she graduates from high school next month. 
B)  Andrea is trying to decide whether to go to graduate school in economics or go to law school. 
C)  Tim is trying to decide the amount of money to save each month to buy a new car next year. 
D)  Andy is trying to decide whether to take a prep course for the Law School Admissions Test.

Question 15

Use the following to answer questions : $$\begin{array}{l}
\text { Table: TC's Pizza Parlor }\
\begin{array} { c c c } 
\hline \begin{array} { l } 
\text { Slices } \
\text { of Pizza }
\end{array} & \text { Total Costs } & \text { Total Benefits } \
\hline 0 & \$ 10 & \$ 0 \
5 & 20 & 40 \
10 & 30 & 55 \
15 & 40 & 65 \
20 & 50 & 70 \
\hline
\end{array}
\end{array}$$
-(Table: TC's Pizza Parlour)Use Table: TC's Pizza Parlour.Assume that the marginal benefit is constant in intervals of production.Suppose that five slices of pizza are being produced.What is the marginal benefit of producing one more slice of pizza?

Accepted Answer

A)  $3 
B)  $2 
C)  $15 
D)  $55

Question 16

Bessie wants to calculate the accounting and economic profits of her cattle farm in Alberta.She pays $30 000 per year in overhead,$80 000 in wages,and $20 000 in insurance.She forgoes $30 000 per year that she could make as a teacher.If her total revenue equals $140 000,that means her accounting profit is _____ and her economic profit is _____.

Accepted Answer

A)  $10 000;-$20 000 
B)  $30 000;-$30 000 
C)  -$10 000;-$10 000 
D)  $60 000;$30 000

Question 17

Profit is the difference between _____ and _____.

Accepted Answer

A)  total sales;total revenues 
B)  total profits;total costs 
C)  total revenues;total costs 
D)  marginal costs;marginal revenues

Question 18

Suppose that a local hardware store has explicit costs of $2 million per year and implicit costs of $44 000 per year.If the store earned an economic profit of $50 000 last year,this means that the store's accounting profit equalled:

Accepted Answer

A)  $94 000. 
B)  $6 000. 
C)  $2.05 million. 
D)  $2.044 million.

Question 19

Use the following to answer questions :
Scenario: Betty's Cookie Shop
Betty runs a cookie shop where she sells cookies for $1 each.She employs five people,each of whom worked a total of 500 hours last year;she paid them $10 per hour.Her costs of equipment and raw materials add up to $75 000.Her business ability is legendary,and other companies have offered to pay Betty $100 000 to come to work for them.She also knows she could sell her cookie shop for $150 000.The bank in town pays an annual interest rate of 3% on all funds deposited with it.
-(Scenario: Betty's Cookie Shop)Use Scenario: Betty's Cookie Shop.Betty is trying to decide at what point she should stop selling cookies,and she knows that she cannot change the price of a cookie.She should stop selling cookies if her:

Accepted Answer

A)  economic profit is positive. 
B)  explicit and implicit costs are less than her revenues. 
C)  implicit costs are greater than her accounting profits. 
D)  economic profit is equal to her accounting profit.

Question 20

Economic profits can be negative,even if accounting profits are positive.

Accepted Answer

A) True 
 B)False

Exam 9: Decision Making by Individuals and Firms

In economics,maximization of the total profit of an activity occurs when:

When a person makes a choice that is close to but not exactly the one that leads to the best possible economic outcome,he or she is:

A sunk cost should be ignored in decisions about future actions.

When a decision maker chooses the option leading to the outcome that he or she most prefers,he or she has made a _____ decision.

In economics,the assumption is that consumers and firms will make choices that maximize the _____ of each activity.

In cities,a kilometre of road lane may cost $30 million or more,while in rural areas,a kilometre of road lane may cost only $5 million.This means that there should be more road lanes in rural areas than in urban areas.

Costs that are included in the economic concept of cost but that are NOT explicit costs are:

In southern Ontario,the demand for real estate has been increasing rapidly for years.Therefore,the _ cost of capital is _ in southern Ontario's peach groves.

When making decisions,a person should consider only costs that actually involve an explicit money outlay.This is because such costs actually have to be paid,whereas implicit costs are only notional or hypothetical.

If the marginal cost of any activity is constant at $4,then at the optimal quantity of the activity,the marginal benefit will be $4.

Star athletes,singers,and actors often start their career very young,forgoing a university education.This is an example of poor decision making since a university education provides benefits that will be invaluable later in their lives.

Which statement describes a "how much" decision?

Profit is the difference between _ and _.

Suppose that a local hardware store has explicit costs of $2 million per year and implicit costs of $44 000 per year.If the store earned an economic profit of $50 000 last year,this means that the store's accounting profit equalled:

Economic profits can be negative,even if accounting profits are positive.