11
34) The rate of return on capital that is just sufficient to keep owners and investors satisfied is called
A) economic profit.
B) a minimum efficient scale.
C) the price–earnings ratio.
D) a normal rate of return.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Definition
Learning Outcome: Micro-9
35) The process by which inputs are combined, transformed, and turned into outputs is called
A) production.
B) technology.
C) capitalization.
D) outsourcing.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Definition
Learning Outcome: Micro-9
36) The Sweet Success Bakery sells 500 cakes at a price of $10 per cake. Its total economic costs for
producing 500 cakes are $500. The Sweet Success Bakery’s economic profits are
A) $100.
B) $3,500.
C) $4,500.
D) indeterminate from this information.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-9
37) The Cakery Bakery sells 200 muffins at a price of $2 per muffin. Its explicit costs for producing 200
muffins are $350. The Cakery Bakery’s economic profits are
A) $35.
B) $50.
C) $400.
D) indeterminate from this information.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-9
12
38) The Cakery Bakery sells 200 muffins at a price of $2 per muffin. Its explicit costs for producing 200
muffins are $350. If the bakery is earning a normal rate of return, then its implicit costs must be
A) $0.
B) $50.
C) $350.
D) $400.
Topic: The Behavior of Profit-Maximizing Firms
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-9
39) A firm ________ if it earns zero economic profit.
A) earns a negative rate of return
B) will leave the industry
C) earns a positive but below normal rate of return
D) earns exactly a normal rate of return
Topic: The Behavior of Profit–Maximizing Firms
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-9
40) You own a building that has four possible uses: a tailor shop, a pharmacy, a sports bar, and an antique
mall. The building’s value in each use is $4,000; $6,000; $8,000; and $10,000, respectively. You decide to
open a sports bar. The opportunity cost of using this building for a sports bar is
A) $4,000, the value if the building is used as a tailor shop.
B) $6,000, the value if the building is used as a pharmacy.
C) $20,000, the sum of the values if the building is used for a tailor shop, a pharmacy, or an antique mall.
D) $10,000, the value if you rented the building to someone else to use as an antique mall.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-9
13
Refer to Scenario 7.4 below to answer the question(s) that follow.
SCENARIO 7.4: You own and are the only employee of a company that sells custom embroidered pet
sweaters. Last year your total revenue was $120,000. Your costs for equipment, rent, and supplies were
$30,000. To start this business you invested an amount of your own capital that could pay you a $50,000 a
year return.
41) Refer to Scenario 7.4. During the year your economic costs were
A) $30,000.
B) $50,000.
C) $80,000.
D) $120,000.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-9
42) Refer to Scenario 7.4. A yearly normal return for your company would be
A) $40,000.
B) $50,000.
C) $70,000.
D) $90,000.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-9
43) Refer to Scenario 7.4. Your accounting profit last year was
A) $20,000.
B) $40,000.
C) $70,000.
D) $90,000.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-9
14
44) Refer to Scenario 7.4. Your economic profit last year was
A) –$20,000.
B) $40,000.
C) $70,000.
D) $90,000.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-9
Refer to Scenario 7.5 below to answer the question(s) that follow.
SCENARIO 7.5: You own and are the only employee of a company that customizes bicycles. Last year
your total revenue was $60,000. Your costs for rent and supplies were $25,000. To start this business you
invested an amount of your own capital that could pay you a $45,000 a year return.
45) Refer to Scenario 7.5. During the year your economic costs were
A) $25,000.
B) $35,000.
C) $45,000.
D) $70,000.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-9
46) Refer to Scenario 7.5. A yearly normal return for your company is
A) $25,000.
B) $35,000.
C) $45,000.
D) $70,000.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-9
15
47) Refer to Scenario 7.5. Your accounting profit last year was
A) –$10,000.
B) $15,000.
C) $35,000.
D) $60,000.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-9
48) Refer to Scenario 7.5. Your economic profit last year was
A) –$20,000.
B) –$10,000.
C) $15,000.
D) $35,000.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-9
Refer to Scenario 7.6 below to answer the question(s) that follow.
SCENARIO 7.6: Upon graduating with an accounting degree, you open your own accounting firm of
which you and your assistant are the only employees. To start the firm you passed on a job offer with a
large accounting firm that offered you a salary of $50,000 annually. Last year you earned a total revenue
of $120,000. Rent and supplies last year were $50,000. Your assistant’s salary is $30,000 annually.
49) Refer to Scenario 7.6. Your annual economic costs are
A) $50,000.
B) $80,000.
C) $100,000.
D) $130,000.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-9
16
50) Refer to Scenario 7.6. Your annual economic profit is
A) –$10,000.
B) $20,000.
C) $40,000.
D) $70,000.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-9
51) Refer to Scenario 7.6. Your annual operating profit is
A) –$10,000.
B) $40,000.
C) $70,000.
D) $80,000.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-9
52) An economist is studying the pricing behavior of Las Vegas all–you–can–eat buffets. He says he will
limit his analysis to a time period that allows for new buffets to enter the market and for existing ones to
leave it. The economist is referring to the ________ time period.
A) market
B) industry
C) long–run
D) short–run
Topic: The Behavior of Profit–Maximizing Firms
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-9
53) A firm has no fixed factors of production in
A) the short run.
B) the long run.
C) the short run and in the long run.
D) neither the short run nor the long run.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-9
17
54) Firms cannot enter an industry in which positive profits are being earned in
A) the short run.
B) the long run.
C) the short run and in the long run.
D) As long as positive profits are being earned, firms can enter the industry in both the short run and the
long run.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-9
55) If Harold runs a grocery store and is making a normal rate of return, we can infer that he is also
making an economic profit.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-9
56) If a firm makes an economic profit, it is making at least a normal rate of return.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-9
57) In the short run, firms can enter an industry but not exit an industry.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-9
58) For economic analysis, the short run is considered less than one year.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Definition
Learning Outcome: Micro-9
59) For economic analysis, the long run is any period in which all inputs are variable (regardless of the
length of time involved).
Topic: The Behavior of Profit–Maximizing Firms
Skill: Definition
Learning Outcome: Micro-9
18
60) Deciding to invest in capital is a short–run decision.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-9
61) For a firm, its economic profit is usually greater than its accounting profit.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-9
62) One decision that all firms must make is how much output to supply.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-9
63) Economic profit accounts for both implicit and explicit costs.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-9
64) Economists consider the long run as a period of more than one year.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Definition
Learning Outcome: Micro-9
65) The optimal method of production maximizes cost for a given level of output.
Topic: The Behavior of Profit–Maximizing Firms
Skill: Definition
Learning Outcome: Micro-9
19
66) Firms make decisions with the goal of maximizing total revenue.
Answer: FALSE
Diff: 1
Topic: The Behavior of Profit–Maximizing Firms
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-9
7.2 The Production Process
1) To determine the optimal method of production for a good or service, a perfectly competitive firm
needs to know all of the following except
A) the market price of output.
B) the technologies of production that are available to the firm.
C) the prices of inputs.
D) the prices charged by its rivals.
Topic: The Production Process
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro–13
2) The optimal method of production is the one that
A) maximizes output regardless of cost.
B) maximizes inputs.
C) minimizes cost.
D) minimizes the normal rate of return.
Topic: The Production Process
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-9
3) An act of production, as economists use the term, is demonstrated by which of the following?
A) A worker places money in a pension fund.
B) A local nonprofessional theater company performs a play.
C) An individual buys municipal bonds to avoid taxes.
D) A firm buys a pre–existing building in order to expand its operations.
Topic: The Production Process
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-9
20
Use the information provided in Table 7.1 below to answer the question(s) that follow.
Table 7.1
Inputs Required to Produce a Product Using Alternative Technologies
4) Refer to Table 7.1. Which technology is the most labor intensive?
A) A
B) B
C) C
D) D
Topic: The Production Process
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro–17
5) Refer to Table 7.1. Which technology is the most capital intensive?
A) A
B) B
C) C
D) D
Topic: The Production Process
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro–17
6) Refer to Table 7.1. If the hourly wage rate is $7 and the hourly price of capital is $10, which production
technology should be selected?
A) A
B) B
C) C
D) D
Topic: The Production Process
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro–17