Chapter 13 /The Costs of Production 113
Chapter 13
The Costs of Production
MULTIPLE CHOICE
1. According to the law of supply,
a. firms’ production levels are not correlated with the price of a good.
b. the supply curve slopes downward.
c. firms are willing to produce a greater quantity of a good when the price of the good is higher.
d. None of the above are correct.
ANSWER: c. firms are willing to produce a greater quantity of a good when the price of the good is higher.
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2. Industrial organization is the study of how
a. labor unions organize workers in industries.
b. profitable firms are in organized industries.
c. industries organize for political advantage.
d. firms’ decisions regarding prices and quantities depend on the market conditions they face.
ANSWER: d. firms’ decisions regarding prices and quantities depend on the market conditions they face.
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3. Economists normally assume that the goal of a firm is to
(i) sell as much of their product as possible.
(ii) set the price of their product as high as possible.
(iii) maximize profit.
a. (i) and (ii)
b. (ii) and (iii)
c. (iii) only
d. All of the above are correct.
ANSWER: c. (iii) only
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4. The amount of money that a firm receives from the sale of its output is called
a. total gross profit.
b. total net profit.
c. total revenue.
d. net revenue.
ANSWER: c. total revenue.
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5. The amount of money that a firm pays to buy inputs is called
a. total cost.
b. variable cost.
c. marginal cost.
d. fixed cost.
ANSWER: a. total cost.
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6. Profit is defined as
a. net revenue minus depreciation.
b. total revenue minus total cost.
c. average revenue minus average total cost.
d. marginal revenue minus marginal cost.
ANSWER: b. total revenue minus total cost.
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Chapter 13 /The Costs of Production 114
7. Which of the following can be added to profit to obtain total revenue?
a. net profit
b. capital profit
c. operational profit
d. total cost
ANSWER: d. total cost
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8. Economists normally assume that the goal of a firm is to
(i) make profit as large as possible even if it means reducing output.
(ii) make profit as large as possible even if it means incurring a higher total cost.
(iii) make revenue as large as possible.
a. (i) and (ii)
b. (i) and (iii)
c. (ii) and (iii)
d. None of the above are correct.
ANSWER: a. (i) and (ii)
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9. Total revenue equals
a. total output multiplied by price per unit of output.
b. total output divided by profit.
c. (total output multiplied by sales price) – inventory surplus.
d. (total output multiplied by sales price) – inventory shortage.
ANSWER: a. total output multiplied by price per unit of output.
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10. Those things that must be forgone to acquire a good are called
a. substitutes.
b. opportunity costs.
c. explicit costs.
d. competitors.
ANSWER: b. opportunity costs.
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11. XYZ corporation produced 300 units of output but sold only 275 of the units it produced. The average cost of
production for each unit of output produced was $100. Each of the 275 units sold was sold for a price of $95. Total
revenue for the XYZ corporation would be
a. –$3,875.
b. $26,125.
c. $28,500.
d. $30,000.
ANSWER: b. $26,125.
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12. Explicit costs
a. require an outlay of money by the firm.
b. include all of the firm’s opportunity costs.
c. include income that is forgone by the firm’s owners.
d. All of the above are correct.
ANSWER: a. require an outlay of money by the firm.
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Chapter 13 /The Costs of Production 115
13. Which of the following would be categorized as an implicit cost?
(i) wages of workers
(ii) raw material costs
(iii) forgone investment opportunities
a. (i) and (iii)
b. (iii) only
c. (ii) and (iii)
d. All of the above are correct.
ANSWER: d. All of the above are correct.
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14. An example of an explicit cost of production would be
a. the cost of forgone labor earnings for an entrepreneur.
b. the lost opportunity to invest in other capital markets when the money is invested in one’s business.
c. the cost of flour for a baker.
d. None of the above are correct.
ANSWER: c. the cost of flour for a baker.
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15. Which of the following is an implicit cost?
(i) the owner of a firm forgoing an opportunity to earn a large salary working for a Wall Street brokerage firm
(ii) interest paid on the firm’s debt
(iii) rent paid by the firm to lease office space
a. (ii) and (iii)
b. (i) and (iii)
c. (i) only
d. All of the above are correct.
ANSWER: c. (i) only
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16. An example of an implicit cost of production would be
a. the income an entrepreneur could have earned working for someone else.
b. the cost of raw materials for producing bread in a bakery.
c. the cost of a delivery truck in a business that rarely makes deliveries.
d. All of the above are correct.
ANSWER: a. the income an entrepreneur could have earned working for someone else.
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17. To an economist, the field of industrial organization answers which of the following questions?
a. Why are consumers subject to the law of demand?
b. Why do firms experience falling marginal product of labor?
c. How does the difference in the number of firms affect prices and the efficiency of market outcomes?
d. Why do firms consider production costs when determining product supply?
ANSWER: c. How does the difference in the number of firms affect prices and the efficiency of market outcomes?
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18. Accountants are primarily interested in the
a. flow of money into and out of firms.
b. stock of assets of firms.
c. marginal costs of production of firms.
d. taxes due on capital assets of firms.
ANSWER: a. flow of money into and out of firms.
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Chapter 13 /The Costs of Production 116
19. John owns a shoe-shine business. His accountant most likely includes which of the following costs on his financial
statements?
a. wages John could earn washing windows
b. dividends John’s money was earning in the stock market before John sold his stock and bought a shoe-shine
booth
c. the cost of shoe polish
d. All of the above are correct.
ANSWER: c. the cost of shoe polish
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20. Which of the following costs would be regarded as an implicit cost?
a. the cost of accounting services
b. the opportunity cost of financial capital that has been invested in the business
c. the cost of compliance with government regulation
d. all costs that involve outlays of money by the firm
ANSWER: b. the opportunity cost of financial capital that has been invested in the business
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21. Which of the following is an implicit cost of owning a business?
(i) interest expense on existing business loans
(ii) forgone savings account interest when personal money is invested in the business
(iii) damaged or lost inventory
a. (i) only
b. (ii) only
c. (i) and (ii)
d. All of the above are correct.
ANSWER: b. (ii) only
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22. The amount of money that a wheat farmer could have earned if he had planted barley instead of wheat is
a. an explicit cost.
b. an accounting cost
c. an implicit cost.
d. forgone accounting profit.
ANSWER: c. an implicit cost.
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Use the following information to answer questions 23 and 24.
Joe wants to start his own business. The business he wants to start will require that he purchase a factory that costs
$300,000. To finance this purchase, he will use $100,000 of his own money, on which he has been earning 10 percent
interest. In addition, he will borrow $200,000, and he will pay 12 percent interest on that loan.
23. For the first year of operation, what is the explicit cost of purchasing the factory?
a. $12,000
b. $20,000
c. $24,000
d. $44,000
ANSWER: c. $24,000
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24. For the first year of operation, what is the opportunity cost of purchasing the factory?
a. $10,000
b. $20,000
c. $24,000
d. $34,000
ANSWER: d. $34,000
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Chapter 13 /The Costs of Production 117
25. Economic profit is equal to
a. total revenue minus the explicit cost of producing goods and services.
b. total revenue minus the opportunity cost of producing goods and services.
c. total revenue minus the accounting cost of producing goods and services.
d. average revenue minus the average cost of producing the last unit of a good or service.
ANSWER: b. total revenue minus the opportunity cost of producing goods and services.
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26. Accounting profit is equal to
a. marginal revenue minus marginal cost.
b. total revenue minus the explicit cost of producing goods and services.
c. total revenue minus the opportunity cost of producing goods and services.
d. average revenue minus the average cost of producing the last unit of a good or service.
ANSWER: b. total revenue minus the explicit cost of producing goods and services.
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27. Economic profit is equal to
(i) total revenue – (explicit costs + implicit costs).
(ii) total revenue – opportunity costs.
(iii) accounting profit + implicit costs.
a. (i) only
b. (i) and (ii)
c. (ii) and (iii).
d. All of the above are correct.
ANSWER: b. (i) and (ii)
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28. Accounting profit is equal to
(i) total revenue – implicit costs.
(ii) total revenue – opportunity costs.
(iii) economic profit + implicit costs.
a. (i) only
b. (iii) only
c. (i) and (ii)
d. None of the above are correct.
ANSWER: b. (iii) only
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29. Economic profit
a. will never exceed accounting profit.
b. is most often equal to accounting profit.
c. is always at least as large as accounting profit.
d. is a less complete measure of profitability than accounting profit.
ANSWER: a. will never exceed accounting profit.
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30. To an economist, it is conceivable that the objective that motivates an individual entrepreneur to start a business
arises from
a. an innate love for the type of business that he or she starts.
b. a desire to earn a profit.
c. an altruistic desire to provide the world with a good product.
d. All of the above are correct.
ANSWER: d. All of the above are correct.
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Chapter 13 /The Costs of Production 118
31. When a firm is making a profit-maximizing production decision, which of the following principles of economics is
likely to be most important to the firm’s decision?
a. The cost of something is what you give up to get it.
b. A country’s standard of living depends on its ability to produce goods and services.
c. Prices rise when the government prints too much money.
d. Governments can sometimes improve market outcomes.
ANSWER: a. The cost of something is what you give up to get it.
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32. Gordon is a senior majoring in computer network development at Smart State University. While he has been
attending college, Gordon started a computer consulting business to help senior citizens set up their network
connections and teach them how to use e-mail. Gordon charges $25 per hour for his consulting services. Gordon also
works 5 hours a week for the Economics Department to maintain that department’s Web page. The Economics
Department pays Gordon $20 per hour. From this information we can conclude:
a. Gordon should increase the number of hours he works for the Economics Department to make it comparable to
his consulting business income.
b. Gordon is obviously not maximizing his well-being if he continues to work for the Economics Department.
c. If Gordon chooses one hour at the beach with his friends rather than spend one more hour with a consulting
client, the forgone income of $25 is considered a cost of the choice to go to the beach.
d. If the Economics Department offers Gordon a full-time job he will definitely not take the job offer.
ANSWER: c. If Gordon chooses one hour at the beach with his friends rather than spend one more hour with a
consulting client, the forgone income of $25 is considered a cost of the choice to go to the beach.
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33. Economists normally assume that the goal of a firm is to
a. maximize its total revenue.
b. maximize its profit.
c. minimize its explicit costs.
d. minimize its total cost.
ANSWER: b. maximize its profit.
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34. Explicit costs
a. require an outlay of money by the firm.
b. enter into the accountant’s measurement of a firm’s profit.
c. enter into the economist’s measurement of a firm’s profit.
d. All of the above are correct.
ANSWER: d. All of the above are correct.
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35. A certain firm manufactures and sells computer chips. Last year, it sold 2 million chips at a price of $10 per chip. For
last year, the firm’s
a. accounting profit amounted to $20 million.
b. economic profit amounted to $20 million.
c. total revenue amounted to $20 million.
d. explicit costs amounted to $20 million.
ANSWER: c. total revenue amounted to $20 million.
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36. A firm’s opportunity costs of production amount to its
a. explicit costs only.
b. implicit costs only.
c. explicit costs + implicit costs.
d. explicit costs + implicit costs + total revenue.
ANSWER: c. explicit costs + implicit costs.
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Chapter 13 /The Costs of Production 119
37. Which of the following expressions is correct?
a. accounting profit = total revenue – explicit costs.
b. economic profit = total revenue – total opportunity costs.
c. economic profit = total revenue – explicit costs – implicit costs.
d. All of the above are correct.
ANSWER: d. All of the above are correct.
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38. Which of the following expressions is correct?
a. accounting profit = economic profit + implicit costs
b. accounting profit = total revenue – implicit costs
c. economic profit = accounting profit + explicit costs
d. economic profit = total revenue – implicit costs
ANSWER: a. accounting profit = economic profit + implicit costs.
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39. Susan used to work as a telemarketer, earning $25,000 per year. She gave up that job to start a catering business. In
calculating the economic profit of her catering business, the $25,000 income that she gave up is counted as part of the
catering firm’s
a. total revenue.
b. opportunity costs.
c. explicit costs.
