Deck 9: Decision Making by Individuals Firms

Question 1

Accounting profit differs from economic profit because:

A) of differences in the manner in which revenue is calculated.
B) economic costs include explicit costs, while accounting costs do not.
C) accounting costs are generally higher than economic costs because accounting costs include explicit and implicit costs, while economic costs include only explicit costs.
D) economic costs are generally higher than accounting costs because economic costs include all opportunity costs, while accounting costs include explicit costs only.

Answer 1

D

Question 2

Suppose the Chicago Cubs could rent out Wrigley Field (the field they play on) to local youth leagues for $11,000 per month. The $11,000 per month is the _____ cost of capital.

A) implicit
B) explicit
C) direct
D) total

Answer 2

A

Question 3

Profit computed without implicit costs is _____ profit.

A) explicit
B) accounting
C) implicit
D) economic

Answer 3

B

Question 4

Money that must be paid for the use of factors of production such as labor and capital is an:

A) explicit cost.
B) accounting profit.
C) implicit cost.
D) economic profit.

Question 5

In central Florida, the demand for real estate has been increasing rapidly for years. Therefore, the _____ cost of capital is _____ in central Florida's orange groves.

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

Question 6

The implicit cost of capital is:

A) the explicit cost of capital that the firm might have used but didn't need to.
B) depreciation.
C) the opportunity cost of the capital used by a business.
D) the cost of human capital.

Question 7

The implicit cost of capital is:

A) the expense associated with leasing machines.
B) the expense associated with buying machines.
C) the opportunity cost of capital used by a business.
D) irrelevant for determining economic profit.

Question 8

Jacquelyn is a student at a major state university. Which of the following is NOT an explicit cost of her attending college?

A) tuition
B) textbooks
C) the salary that she could have earned working full-time
D) computer lab fees

Question 9

For most firms, economic profit is:

A) less than accounting profit.
B) equal to accounting profit.
C) greater than accounting profit.
D) negative.

Question 10

Suppose a local floral shop has explicit costs of $200,000 per year and implicit costs of $50,000 per year. If the store earned an economic profit of $50,000 last year, the store's accounting profit equaled:

A) $10,000.
B) $50,000.
C) $100,000.
D) $200,000.

Question 11

Accountants use only _____ costs in their computations.

A) opportunity
B) implicit
C) explicit
D) variable

Question 12

After earning your BA, you have to decide whether to take a job that will pay you $45,000 per year or spend an additional two years earning an MBA. If you decide to pursue the graduate degree, your annual expenses for tuition, books, board, and lodging will be $32,000. You have been offered a scholarship for $10,000 per year, but to pay the remaining $22,000 per year, you would have to cash in savings bonds from your grandparents that have been earning $500 in interest per year. The annual opportunity cost of earning your MBA is:

A) $67,500.
B) $77,000.
C) $99,000.
D) $77,500.

Question 13

Sarah's accountant tells her that she made a profit of $43,002 running a pottery studio in Orlando. Sarah's husband, an economist, claims Sarah lost $43,002 running her pottery studio. This means her husband is claiming that she incurred _____ in _____ costs.

A) $86,004; implicit
B) $43,002; implicit
C) $43,002; explicit
D) $86,004; explicit

Question 14

You own a small deli that sells sandwiches, salads, and soup. Which of the following is an implicit cost of the business?

A) wages paid to part-time employees
B) the job offer you did not accept at a local catering service
C) bread, meat, and vegetables used to produce the items on your menu
D) your monthly utility bill

Question 15

Expenses associated with factors of production may be _____ costs.

A) implicit
B) opportunity
C) explicit
D) implicit, opportunity, or explicit

Question 16

Part of the _____ associated with the Chicago Cubs baseball team is their batting cages used in practice.

A) labor
B) land
C) capital
D) entrepreneurship

Question 17

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

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

Question 18

Suppose 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 equaled:

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

Question 19

If the accounting profit for a firm is negative:

A) the economic profit must be positive.
B) the economic profit must be negative.
C) the firm should produce more.
D) the firm will not owe any taxes.

Question 20

Which of the following statements about opportunity cost is FALSE?

A) Opportunity cost may be larger than monetary cost.
B) Opportunity cost includes both explicit and implicit costs.
C) The real or opportunity cost of something is what you must give up to get it.
D) Opportunity cost is synonymous with explicit cost.

Question 21

Suppose Eastland College does not have a summer program and could rent out the campus to various summer sports camps for $100,000. The potential revenue of the summer camps represents:

A) an implicit cost of capital.
B) an explicit cost.
C) a total cost.
D) a sunk cost.

Question 22

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. Instead of using the capital for his own business, he could rent it to a rival firm and earn $5,000 a year. In his first year, his revenue was $150,000.
(Scenario: Accounting and Economic Profit) Look at the scenario Accounting and Economic Profit. The implicit cost of capital for Wang's Wicker Furniture Store is:

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

Question 23

Which of the following is an "either-or" decision?

A) Allen must decide how many courses to take this semester.
B) Sally must decide how many hours to spend studying for each of the four courses that she is taking this semester.
C) Chris must decide how many hours to work each week at his part-time job.
D) Dylan must decide whether to major in economics or finance.

Question 24

Accountants use only _____ costs in their computations of short-run total cost.

A) opportunity
B) implicit
C) explicit
D) variable

Question 25

An "either-or" decision entails:

A) deciding how much of an activity to do.
B) a choice between two activities.
C) calculating marginal costs for each activity.
D) calculating the marginal benefits for each activity.

Question 26

During its only year of operation, a firm collected $175,000 in revenue and spent $50,000 on raw materials, labor, and utilities. The owners of the firm spent $100,000 of their own money to build the firm's factory (instead of buying bonds and earning a 10% annual rate of return), which they sold at the end of the year for $100,000. The firm's economic profit is:

A) $35,000.
B) $125,000.
C) $115,000.
D) $25,000.

Question 27

The costs economists use in the concept of economic profit are:

A) accounting costs.
B) strictly dollar costs, not opportunity costs.
C) only implicit costs.
D) accounting costs and implicit costs (i.e., the value of the best opportunity forgone).

Question 28

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. Instead of using the capital for his own business, he could rent it to a rival firm and earn $5,000 a year. In his first year, his revenue was $150,000.
(Scenario: Accounting and Economic Profit) Look at the scenario Accounting and Economic Profit. What is the opportunity cost of Wang's $100,000 inheritance being used to start his business?

A) $0
B) $5,000
C) $10,000
D) $100,000

Question 29

Bessie wants to calculate the accounting and economic profits of her cattle farm in Nebraska. 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 _____.

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

Question 30

George owns a dude ranch in Texas. He pays $32,000 per year in insurance, $408,000 in wages, and $23,000 in supplies. He forgoes $32,000 per year he could make as a police officer. His total revenue last year equaled $460,000. That means his economic _____ equaled _____.

A) profit; $3,000
B) losses; $3,000
C) losses; $35,000
D) profit; $35,000

Question 31

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. Instead of using the capital for his own business, he could rent it to a rival firm and earn $5,000 a year. In his first year, his revenue was $150,000.
(Scenario: Accounting and Economic Profit) Look at the scenario Accounting and Economic Profit. The accounting profit of Wang's Wicker Furniture Store is:

A) $200,000.
B) $60,000.
C) $30,000.
D) $0.

Question 32

Economic profit is:

A) less than accounting profit if implicit costs exist.
B) always equal to accounting profit.
C) greater than accounting profit if implicit costs exist.
D) less than accounting profit if implicit costs are zero.

Question 33

Which of the following is a "how much" decision?

A) Mary is trying to decide whether to go to work or go to college 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 34

Which of the following best describes a "how much" decision?

A) Should I drive to work or ride my bicycle?
B) Should I rent a movie or watch a baseball game on television?
C) Should I attend graduate school or immediately enter the labor force?
D) Should I buy a third hot dog?

Question 35

Until recently Rosemarie worked as an accountant, earning $30,000 annually. Then she inherited a piece of commercial real estate that had been renting for $12,000 annually. Rosemarie decided to leave her job and operate a Peruvian restaurant in the space she inherited. At the end of the first year, her books showed total revenues of $260,000 and total costs of $230,000 for food, utilities, cooks, and other supplies. Her economic profit at the end of one year is:

A) $230,000.
B) $30,000.
C) $0.
D) -$12,000.

Question 36

The dormitories of Eastland College are part of its:

A) land.
B) labor.
C) capital.
D) explicit costs.

Question 37

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. Instead of using the capital for his own business, he could rent it to a rival firm and earn $5,000 a year. In his first year, his revenue was $150,000.
(Scenario: Accounting and Economic Profit) Look at the scenario Accounting and Economic Profit. What is the implicit cost of Wang's Wicker Furniture Store?

A) $7,000
B) $60,000
C) $65,000
D) $69,000

Question 38

Profit is the difference between _____ and _____.

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

Question 39

You decide to quit your $60,000-per-year job as an information technology specialist and illustrate children's books. At the end of the first year of illustrating, you have earned $20,000. You also spent $5,000 for paint and paper. Your economic profit in the first year as an illustrator is:

A) $15,000.
B) $20,000.
C) -$40,000.
D) -$45,000.

Question 40

In making an "either-or" decision:

A) choose the activity that results in the greater economic profit.
B) choose the activity that results in the greater accounting profit.
C) continue in an activity as long as the marginal cost is greater than the marginal benefit.
D) continue in an activity as long as the marginal cost is less than the marginal benefit.

Question 41

The _____ is the amount by which an additional unit of activity increases its total cost.

A) marginal cost
B) average cost
C) average profit
D) marginal benefit

Question 42

Pauli's Pizza offers one slice for $2, two slices for $3.50, three slices for $4.50, and four slices for $5.00. The marginal cost of the third slice is:

A) $4.50.
B) $10.
C) $1.
D) $2.

Question 43

Feng is thinking of mowing lawns over the summer. His friend Jason mows lawns, and he says the marginal cost of mowing the fourth lawn in a day is $40. Feng thinks about it and realizes that the total cost of mowing four lawns is:

A) $160.
B) $40.
C) $80.
D) not possible to determine from the information provided.

Question 44

The amount by which an additional unit of an activity increases total cost is:

A) net benefit.
B) marginal benefit.
C) negative benefit.
D) marginal cost.

Question 45

In economics, a marginal value refers to:

A) the value associated with an unimportant, or marginal, activity.
B) a value entered as an explanatory item in the margin of a balance sheet or other accounts.
C) the value associated with one more unit of an activity.
D) a value that is most appropriately identified in a footnote.

Question 46

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. Instead of using the capital for his own business, he could rent it to a rival firm and earn $5,000 a year. In his first year, his revenue was $150,000.
(Scenario: Accounting and Economic Profit) Look at the scenario Accounting and Economic Profit. The economic profit of Wang's Wicker Furniture Store is:

A) $67,000.
B) $0.
C) -$20,000.
D) -$35,000.

Question 47

For which of the following decisions would marginal analysis be relevant?

A) spending $1,000 on a summer vacation or on painting your house
B) deciding how much to spend on a summer vacation
C) buying a new car or a second-hand car
D) eating dinner at home or going out to a restaurant for dinner

Question 48

Marginal analysis is relevant for:

A) both "either-or" and "how much" decisions.
B) only "either-or" decisions.
C) only "how much" decisions.
D) only situations involving the time value of money.

Question 49

Use the following to answer questions:
Figure: The Marginal Cost Curve
(Figure: The Marginal Cost Curve) Look at the figure The Marginal Cost Curve. The approximate total cost of mowing seven lawns is:

A) $175.
B) $113.
C) $50.
D) $24.

Question 50

A "how much" decision is best made by comparing the _____ of an action to the _____ of that action.

A) explicit costs; implicit costs
B) accounting profit; economic profit
C) marginal benefits; marginal costs
D) present value; net present value

Question 51

Andreas is a political consultant with his own firm. He travels the country and provides campaign advice for political candidates. Last year he earned $250,000 in revenue for his services. He pays one employee $50,000 to manage the small office back home and pays $30,000 on rent and utilities for that office. His accountant tells him that if he sold all of the equipment, he could put that money in the bank and earn $3,000 in interest next year. Andreas also has received an offer to teach political science at a college at a salary of $100,000. Andreas's accounting profit is equal to _____ and his economic profit is equal to _____.

A) $175,000; $67,000
B) $170,000; $67,000
C) $200,000; $72,000
D) $170,000; $70,000

Question 52

Use the following to answer questions:
Figure: The Marginal Cost Curve
(Figure: The Marginal Cost Curve) Look at the figure The Marginal Cost Curve. The total cost of mowing five lawns is approximately:

A) $68.
B) $100.
C) $50.
D) $10.

Question 53

The amount by which an additional unit of an activity increases total benefit is:

A) net benefit.
B) marginal benefit.
C) marginal cost.
D) utility.

Question 54

Use the following to answer questions:
(Table: Marginal Cost of Sweatshirts) Look at the table Marginal Cost of Sweatshirts. The marginal cost of producing sweatshirts is an example of ______ marginal costs.

A) decreasing
B) increasing
C) constant
D) random

Question 55

Use the following to answer questions:
(Table: Marginal Cost of Sweatshirts) Look at the table Marginal Cost of Sweatshirts. The marginal cost of the third sweatshirt is:

A) $33.
B) $13.
C) $11.
D) $9.

Question 56

Use the following to answer questions:
(Table: Marginal Cost of Sweatshirts) Look at the table Marginal Cost of Sweatshirts. The marginal cost of the fifth sweatshirt is:

A) $17.
B) $15.
C) $13.
D) $11.

Question 57

Use the following to answer questions:
(Table: Marginal Cost of Sweatshirts) Look at the table Marginal Cost of Sweatshirts. The marginal cost of the fourth sweatshirt is:

A) $9.
B) $20.
C) $24.
D) $15.

Question 58

In economic analysis, the principle of marginal analysis refers to:

A) dividing large problems into smaller, more manageable ones.
B) the notion that a group's problems can be effectively analyzed by focusing on only a small subsample of the group.
C) the result that the optimal quantity of an activity is that at which marginal benefit is equal to marginal cost.
D) the result that the optimal quantity of an activity is that at which the net benefit of the representative, or marginal, individual is maximized.

Question 59

Use the following to answer questions:
Figure: The Marginal Cost Curve
(Figure: The Marginal Cost Curve) Look at the figure The Marginal Cost Curve. The total cost of mowing four lawns is approximately:

A) $10.
B) $15.
C) $50.
D) $100.

Question 60

Use the following to answer questions:
(Table: Marginal Cost of Sweatshirts) Look at the table Marginal Cost of Sweatshirts. The marginal cost of the second sweatshirt is:

A) $9.
B) $20.
C) $11.
D) $29.

Question 61

Use the following to answer questions:
(Table: Marginal Benefit of Sweatshirts) Look at the table Marginal Benefit of Sweatshirts. The marginal benefit of producing the third sweatshirt is:

A) $31.
B) $16.
C) $15.
D) $14.

Question 62

Joan loves sushi. Her first piece of sushi normally gives her a marginal benefit of $5. Each additional piece yields a marginal benefit that declines by $0.25 per piece. If her favorite sushi bar charges $2.75 per piece of sushi, how many pieces should she eat?

A) 8
B) 10
C) 5
D) 11

Question 63

Pauli's Pizza offers one slice for $2, two slices for $3.50, three slices for $4.50, and four slices for $5.00. Sal orders two slices. From this we know that Sal's marginal benefit from the second slice must be at least _____ and the marginal benefit from the third slice must be less than _____.

A) $3.50; $4.50
B) $3.50; $1.00
C) $1.50; $1.00
D) $1.50; $4.50

Question 64

Use the following to answer questions:
(Table: Marginal Benefit of Sweatshirts) Look at the table Marginal Benefit of Sweatshirts. The marginal benefit of producing the fourth sweatshirt is:

A) $58.
B) $14.
C) $13.
D) $12.

Question 65

In general, when marginal benefit is greater than marginal cost, the decision maker should do _____ of the activity.

A) less
B) that exact amount
C) more
D) none

Question 66

Use the following to answer questions:
Figure: The Marginal Benefit Curve
(Figure: The Marginal Benefit Curve) Look at the figure The Marginal Benefit Curve. The total benefit of mowing four lawns is approximately:

A) $25.
B) $35.
C) $80.
D) $114.

Question 67

Tara notices that studying for one hour after class increases her economics grade by 11 points. The second hour yields a 7-point gain, the third hour yields a 4-point gain, and the fourth hour yields only a 1-point gain. This means that the marginal _____ of studying decreases with study hours.

A) cost
B) benefit
C) opportunity cost
D) time

Question 68

Use the following to answer questions:
(Table: Marginal Benefit of Sweatshirts) Look at the table Marginal Benefit of Sweatshirts. The marginal benefit of producing the second sweatshirt is:

A) $31.
B) $16.
C) $15.
D) $14.

Question 69

Wendy sells ice-making machines. She can sell six per week at a price of $2,000 per machine. If she charges $2,100 per machine, she will sell only five per week. The marginal benefit of selling the sixth ice-making machine is:

A) $2,000.
B) $2,100.
C) $12,000.
D) $1,500.

Question 70

Use the following to answer questions:
(Table: Marginal Benefit of Sweatshirts) Look at the table Marginal Benefit of Sweatshirts. The marginal benefit of producing the fifth sweatshirt is:

A) $70.
B) $14.
C) $13.
D) $12.

Question 71

Some highways have one lane; others have two, three, or more. If each lane costs $10 million per mile, an economist assumes that the total benefit of a three-lane highway must be _____ million per mile.

A) less than $10
B) $10 to $20
C) $20 to $30
D) $30 or more

Question 72

The _____ benefit is the amount by which an additional unit of an activity increases its total benefit.

A) average
B) net
C) marginal
D) top

Question 73

Werner installs custom sound systems in cars. If he installs seven systems per day, his total costs are $300. If he installs eight systems per day, his total costs are $400. Werner will install eight sound systems per day only if the eighth customer is willing to pay at least:

A) $300.
B) $400.
C) $100.
D) $50.

Question 74

Use the following to answer questions:
Figure: The Marginal Benefit Curve
(Figure: The Marginal Benefit Curve) Look at the figure The Marginal Benefit Curve. The total benefit of mowing six lawns is approximately:

A) $19.
B) $35.
C) $154.
D) $200.

Question 75

Whenever marginal benefit is less than marginal cost, the decision maker should do _____ of the activity.

A) less
B) that exact amount
C) more
D) none

Question 76

While eating pizza, you discover that the marginal benefit of eating one more slice is greater than the marginal cost of that slice. You conclude that:

A) you will be better off if you eat one more slice.
B) you will be no better off and no worse off if you eat one more slice.
C) you will be worse off if you eat one more slice.
D) the total cost of eating the pizza will be more than the total benefit of eating the pizza.

Question 77

In economic analysis, at the optimal quantity of an activity:

A) marginal benefit exceeds marginal cost by the greatest amount.
B) total benefit exceeds total cost by the greatest amount.
C) marginal benefit equals marginal cost.
D) total benefit exceeds total cost by the greatest amount and marginal benefit equals marginal cost.

Question 78

Constant marginal costs occur when production of each individual unit costs:

A) less than the previous one.
B) more than the previous one.
C) the same as the previous one.
D) more than the next one.

Question 79

Use the following to answer questions:
Figure: The Marginal Benefit Curve
(Figure: The Marginal Benefit Curve) Look at the figure The Marginal Benefit Curve. The total benefit of mowing seven lawns is approximately:

A) $172.
B) $140.
C) $60.
D) $18.

Question 80

Marginal benefit:

A) is the subsidiary benefit from an activity; for example, the main benefit from weight training is an increase in muscle mass, and the subsidiary or marginal benefit might be a reduction in cholesterol.
B) is the addition to total benefit due to undertaking one more unit of an activity.
C) must be increasing if total benefit is increasing.
D) normally increases as more of an activity is undertaken.