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Chapter 09 Businesses and the Costs of Production Answer Key
Multiple Choice Questions
1.
Economic cost can best be defined as
A.
any contractual obligation that results in a flow of money expenditures from an enterprise to
resource suppliers.
B.
any contractual obligation to labor or material suppliers.
2. Economic cost can best be defined as
3.
Which of the following constitutes an implicit cost to the Johnston Manufacturing Company?
A.
payments of wages to its office workers
B.
rent paid for the use of equipment owned by the Schultz Machinery Company
9-2
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
C.
use of savings to pay operating expenses instead of generating interest income
D. economic profits resulting from current production
AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
Difficu lty: 02 Medium
Learning Objective: 09-01 Explain why economic costs include both explicit revealed and
expressed costs and implicit present but not obvious costs.
Test Bank: I
To p ic : Economic Costs
4.
Which of the following is most likely to be an implicit cost for Company X?
5.
Production costs to an economist
6.
What do wages paid to factory workers, interest paid on a bank loan, forgone interest, and the
purchase of component parts have in common?
A.
None are either implicit or explicit costs.
7. To the economist, total cost includes
D. explicit, but not implicit, costs.
8.
Implicit and explicit costs are different in that
A.
explicit costs are opportunity costs; implicit costs are not.
9-4
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Learning Objective: 09-01 Explain why economic costs include both explicit revealed and
expressed costs and implicit present but not obvious costs.
Test Bank: I
To p ic : Economic Costs
9. Accounting profits equal total revenue minus
D.
economic profits.
10. An explicit cost is
D.
always in excess of a resource's opportunity cost.
11. Accounting profits are typically
A.
greater than economic profits because the former do not take explicit costs into account.
B.
equal to economic profits because accounting costs include all opportunity costs.
9-5
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
Difficu lty: 02 Medium
Learning Objective: 09-01 Explain why economic costs include both explicit revealed and
expressed costs and implicit present but not obvious costs.
Test Bank: I
To p ic : Economic Costs
12.
Economic profits are calculated by subtracting
A.
explicit costs from total revenue.
B.
implicit costs from total revenue.
13. Normal profit is
A.
determined by subtracting implicit costs from total revenue.
B.
determined by subtracting explicit costs from total revenue.
14.
Which of the following definitions is correct?
A.
Accounting profit + economic profit = normal profit.
B.
Economic profit − accounting profit = explicit costs.
9-6
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
C. Economic profit = accounting profit − implicit costs.
D. Economic profit − implicit costs = accounting profits.
AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
Difficu lty: 02 Medium
Learning Objective: 09-01 Explain why economic costs include both explicit revealed and
expressed costs and implicit present but not obvious costs.
Test Bank: I
To p ic : Economic Costs
15.
Suppose that a business incurred implicit costs of $200,000 and explicit costs of $1 million
in a specific year. If the firm sold 4,000 units of its output at $300 per unit, its accounting profits
were
A.
$100,000 and its economic profits were $0.
16. Suppose that a business incurred implicit costs of $500,000 and explicit costs of $5
million in a specific year. If the firm sold 100,000 units of its output at $50 per unit, its
accounting
A.
profits were $100,000 and its economic profits were $0.
9-7
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
expressed costs and implicit present but not obvious costs.
Test Bank: I
To p ic : Economic Costs
17.
The following is cost information for the Creamy Crisp Donut Company.
Entrepreneur's potential earnings as a salaried worker = $50,000
Annual lease on building =
$22,000
Annual revenue from operations = $380,000
Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000
Entrepreneur's
forgone interest on personal funds used to finance the business = $6,000
Creamy Crisp's explicit costs are
A. $286,000.
18.
The following is cost information for the Creamy Crisp Donut Company.
Entrepreneur's potential earnings as a salaried worker = $50,000
Annual lease on building =
$22,000
Annual revenue from operations = $380,000
Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000
Entrepreneur's
forgone interest on personal funds used to finance the business = $6,000
Creamy Crisp's implicit costs, including a normal profit, are
C. $94,000.
D. $156,000.
19.
The following is cost information for the Creamy Crisp Donut Company.
Entrepreneur's potential earnings as a salaried worker = $50,000
Annual lease on building =
$22,000
Annual revenue from operations = $380,000 Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000
Entrepreneur's forgone interest on personal funds used to finance the business = $6,000
Creamy Crisp's total economic costs are
D. $156,000.
20.
The following is cost information for the Creamy Crisp Donut Company.
Entrepreneur's potential earnings as a salaried worker = $50,000
Annual lease on building =
$22,000
Annual revenue from operations = $380,000 Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000
Entrepreneur's forgone interest on personal funds used to finance the business = $6,000
Creamy Crisp's accounting profit is
A. $150,000.
21.
The following is cost information for the Creamy Crisp Donut Company.
Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building
= $22,000
Annual revenue from operations = $380,000
Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000
Entrepreneur's
forgone interest on personal funds used to finance the business = $6,000
Creamy Crisp's economic profit is
A. $150,000.
9-10
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
To p ic : Economic Costs
22.
The following is cost information for the Creamy Crisp Donut Company.
Entrepreneur's potential earnings as a salaried worker = $50,000
Annual lease on building =
$22,000
Annual revenue from operations = $380,000
Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000
Entrepreneur's forgone interest on personal funds used to finance the business = $6,000
Creamy Crisp's total revenues exceed its total costs, including a normal profit, by
23.
The following is cost information for the Creamy Crisp Donut Company.
Entrepreneur's potential earnings as a salaried worker = $50,000
Annual lease on building =
$22,000
Annual revenue from operations = $380,000 Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000
Entrepreneur's forgone interest on personal funds used to finance the business = $6,000
Creamy Crisp
A. has lower implicit costs, including a normal profit, than its explicit costs.
B.
is earning a normal profit but not an economic profit.
9-11
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
Difficu lty: 02 Medium
Learning Objective: 09-01 Explain why economic costs include both explicit revealed and
expressed costs and implicit present but not obvious costs.
Test Bank: I
To p ic : Economic Costs
24.
The following is cost information for the Creamy Crisp Donut Company.
Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building
= $22,000
Annual revenue from operations = $380,000
Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000
Entrepreneur's
forgone interest on personal funds used to finance the business = $6,000
If, other things equal, Creamy Crisp's revenue fell to $286,000,
A. its implicit costs, including a normal profit, would exceed its explicit costs.
25. The basic characteristic of the short run is that
A. barriers to entry prevent new firms from entering the industry.
9-12
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
Difficu lty: 02 Medium
Learning Objective: 09-01 Explain why economic costs include both explicit revealed and
expressed costs and implicit present but not obvious costs.
Test Bank: I
To p ic : Economic Costs
26.
Which of the following represents a long-run adjustment?
A.
A farmer uses an extra dose of fertilizer on his corn crop.
27.
Which of the following is a short-run adjustment?
D. BMW constructs a new assembly plant in South Carolina.
28. To economists, the main difference between the short run and the long run is that
A.
the law of diminishing returns applies in the long run, but not in the short run.
29.
The amount of calendar time associated with the long run
A.
is less than that associated with the immediate market period.
30. The basic difference between the short run and the long run is that
A. all costs are fixed in the short run, but all costs are variable in the long run.
B. the law of diminishing returns applies in the long run but not in the short run.
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Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Test Bank: I
To p ic : Economic Costs
31. Maria’s Mexican Cantina is a restaurant that has been around for 30 years. In that time
they have remained in the same building and only changed inputs such as staff and the
menu. Based on this, we can conclude that Maria’s
A.
has only ever operated in the short run.
B.
experienced a long run change whenever it changed personnel.
32.
The short run is characterized by
A.
plenty of time for firms to either enter or leave the industry.
B. increasing but not diminishing returns.
33.
The long run is characterized by
A. the relevance of the law of diminishing returns.
B.
at least one fixed input.
9-15
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
Difficu lty: 02 Medium
Learning Objective: 09-01 Explain why economic costs include both explicit revealed and
expressed costs and implicit present but not obvious costs.
Test Bank: I
To p ic : Economic Costs
34. Marginal product is
D. total product divided by the number of workers employed.
35.
The law of diminishing returns indicates that
D.
beyond some point, the extra utility derived from additional units of a product will yield the
consumer smaller and smaller extra amounts of satisfaction.
36. Which of the following statements concerning the relationships between total product
(TP), average product (AP), and marginal product (MP) is not correct?
D.
MP cuts AP at the maximum AP.
37. Which of the following best expresses the law of diminishing returns?
A. Because large-scale production allows the realization of economies of scale, the real
costs of production vary directly with the level of output.
B.
Population growth automatically adjusts to that level at which the average product per worker
will be at a maximum.
38.
Answer the question on the basis of the following output data for a firm. Assume that the
amounts of all nonlabor resources are fixed.
Number of
Workers
Units of Output
0
0
1
40
2
90
3
126
4
150
5
165
6
180
Diminishing marginal returns become evident with the addition of the
A. sixth worker.
39.
Answer the question on the basis of the following output data for a firm. Assume that the
amounts of all non labor resources are fixed.
Number of
Workers
Units of Output
0
0
1
40
2
90
3
126
4
150
5
165
6
180
The marginal product of the sixth worker is
A. 180 units of output.
B. 30 units of output.
9-18
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
C. 15 units of output.
D. negative.
AACSB: Knowledge Application
Blooms: Understand
Difficu lty: 02 Medium
Learning Objective: 09-02 Relate the law of diminishing returns to a firms short-run
production costs.
Test Bank: I
To p ic : Short-Run Production Relationships
Type: Table
40.
Answer the question on the basis of the following output data for a firm. Assume that
the amounts of all nonlabor resources are fixed.
Number of
Workers
Units of Output
0
0
1
40
2
90
3
126
4
150
5
165
6
180
Average product is at a maximum when
A.
five workers are hired.
41.
Marginal product
A.
diminishes at all levels of production.
42.
The first, second, and third workers employed by a firm add 24, 18, and 9 units to total
product, respectively. Therefore, we can conclude that
D.
the first worker puts forth more effort than the second and third workers.
43.
If a variable input is added to some fixed input, beyond some point the resulting extra
output will decline. This statement describes
A.
economies and diseconomies of scale.
9-20
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Learning Objective: 09-02 Relate the law of diminishing returns to a firms short-run
production costs.
Test Bank: I
To p ic : Short-Run Production Relationships
44.
If in the short run a firm's total product is increasing, then its
A.
marginal product must also be increasing.
45.
The law of diminishing returns results in
A.
an eventually rising marginal product curve.
46.
The law of diminishing returns describes the
A.
relationship between total costs and total revenues.
B.
profit-maximizing position of a firm.
