Foundations of Microeconomics, 5e (Bade/Parkin)
Chapter 13 Production and Cost
13.1 Economic Cost and Profit
1) The primary goal of a business firm is to
A) promote fairness.
B) make a quality product.
C) promote workforce job satisfaction.
D) maximize profit.
E) increase its production.
2) A firm’s fundamental goal is
A) different for each firm.
B) to make a quality product.
C) to maximize profit.
D) to gain market share.
E) decrease its employment of workers in order to cut its costs.
3) Accountants calculate
A) economic depreciation as part of the firm’s cost.
B) depreciation using Internal Revenue Service rules.
C) the opportunity cost of all the resources the firm uses.
D) all the firm’s implicit costs but only a few of its explicit costs.
E) All of the above answers are correct.
4) John fishes for a living. Last year, he sold $100,000 of fish. Bait, nets and other fishing
supplies cost John $10,000 and he paid $40,000 in salaries to his helpers. Depreciation on his
boat and other equipment, as calculated using IRS rules, was $15,000. What was John’s profit as
would be calculated by an accountant?
A) $165,000
B) $100,000
C) $65,000
D) $35,000
E) None of the above answers is correct.
5) Lauren runs a chili restaurant in San Francisco. Her total revenue last year equaled $111,000.
The rent on her restaurant totaled $48,000. Her labor costs totaled $43,000. Her materials, food
and other variable costs totaled $19,000. To Lauren’s accountant, Lauren
A) incurred a loss of $1,000.
B) earned a profit of $1,000.
C) incurred a loss of $111,000.
D) earned a profit of $111,000.
E) had a total cost equal to $91,000.
6) Lauren runs a chili restaurant in San Francisco. Her total revenue last year was $110,000. The
rent on her restaurant was $48,000, her labor costs were $42,000, and her materials, food and
other variable costs were $20,000. Lauren could have worked as a biologist and earned $50,000
per year. An economist calculates her implicit costs as
A) $150,000.
B) $63,000.
C) $50,000.
D) $110,000.
E) $0 because Lauren did not work as a biologist.
7) When an economist uses the term “cost” referring to a firm, the economist refers to the
A) price of the good to the consumer.
B) explicit cost of producing a good or service.
C) implicit cost of producing a good or service.
D) opportunity cost of producing a good or service, which includes both implicit and explicit
cost.
E) cost that can be actually verified and measured.
8) From a firm’s viewpoint, opportunity cost is the
A) best alternative use customers can find for the firm’s output.
B) cost the firm must pay for the factors of production it employs to attract them from their best
alternative use.
C) accounting cost of resources.
D) price a firm can charge for its output.
E) cost of acquiring the opportunity to sell to its customers.
9) The cost that a firm pays in money to hire a resource is referred to as a ________ cost.
A) minimized
B) maximized
C) explicit
D) implicit
E) total
10) A cost paid in money is
A) not an opportunity cost.
B) an implicit cost and an opportunity cost.
C) an explicit cost and an opportunity cost.
D) not an accounting cost.
E) an explicit cost but not an opportunity cost.
11) Which of the following is an explicit cost in Jim’s business venture?
A) the salary Jim could have earned at another job
B) the interest Jim does not earn because he invested his savings in his business
C) the wages Jim pays his workers
D) Jim’s normal profit
E) Answer A, answer B, and answer D are correct.
12) Darryl runs a ranch in Jackson, Wyoming. The interest on the debt he incurred to buy his
ranch totals $3,000 per year. For Darryl, the interest is
A) an implicit cost.
B) an explicit cost.
C) his normal cost.
D) his normal profit.
E) part of his economic profit.
13) Which of the following is an explicit cost of production?
A) wages paid to workers
B) the electric bill
C) purchases of raw material
D) Only answers A and B are explicit costs because the purchases of raw material is only an
opportunity cost.
E) Answers A, B, and C are all correct.
14) When Ford hires Ernst and Young Consulting to help Ford redesign its marketing, Ford’s
payment to Ernst and Young is classified as
A) an explicit cost.
B) depreciation.
C) an implicit cost.
D) normal profit.
E) economic profit.
15) A cost incurred in the production of a good or service and for which the firm does not need
to make a direct monetary payment, is referred to as ________ cost.
A) a minimized
B) a maximized
C) an explicit
D) an implicit
E) an invisible
16) ________ cost is defined as a cost of production that does not entail a direct money payment.
A) An explicit
B) An implicit
C) A total
D) A fixed
E) A marginal
17) If a business owner decided to expand her business but rather than borrowing money from a
bank used her own funds, then
A) she would be unable to earn a normal profit.
B) there would be no cost associated with the expansion.
C) she would forego the opportunity to earn interest on the money.
D) the money is considered to be an explicit cost.
E) the money is part of her normal profit.
18) Which of the following is an implicit cost?
i. wages paid to workers
ii. the normal profit
iii. the electric bill
A) i only
B) ii only
C) i and ii
D) ii and iii
E) i, ii, and iii
19) Which of the following is an example of an implicit cost?
A) rent on a building
B) the cost of fertilizer for a farmer
C) the economic depreciation of capital equipment the business owns
D) the cost of fuel and materials.
E) wages paid to workers
20) Which of the following is an implicit cost in Jim’s business venture?
i. the salary Jim could have earned at another job
ii. the interest Jim must pay on the loan he incurred to help open his business
iii. the interest Jim lost when he used his savings to help open his business
A) i only
B) ii only
C) iii only
D) i and iii
E) ii and iii
21) Which of the following are correct statements about implicit and explicit costs?
i. Normal profit is an implicit cost.
ii. Economic depreciation is an explicit cost.
iii. Wages are an explicit cost.
A) ii and iii
B) i and iii
C) iii only
D) i, ii, and iii
E) i only
22) The opportunity cost of owning and using a firm’s capital is defined as the capital’s
A) variable cost.
B) fixed cost.
C) economic depreciation.
D) nonpayment depreciation.
E) explicit cost.
23) Economic depreciation is the
A) fall in value of the firm’s capital, calculating using IRS rules.
B) opportunity cost of owning and using the firm’s capital, measured as the change in market
value.
C) decrease in the value of finished goods and services that are held in inventories prior to being
sold.
D) term given to a fall in a company’s stock price.
E) name given to how accountants calculate the depreciation of the company’s capital.
24) Suppose Billy owns a hair salon in Dallas. He has one large hair dryer for which he paid
$1,000. If he can sell the dryer one year later for $800, his total economic depreciation equals
A) $1,000.
B) $200.
C) $800.
D) $1,800.
E) None of the above answers are correct.
25) A firm pays $50,000 for a machine that is used in production for one year, after which it is
sold for $40,000 to another firm. The $10,000 difference is
A) an explicit cost of production.
B) economic depreciation, an implicit cost of production.
C) normal profit.
D) not counted as an economic cost of production.
E) not an opportunity cost because it is not actually paid.
26) In economics, a “normal profit” is the return to
A) labor.
B) capital.
C) land.
D) entrepreneurship.
E) Answer B and answer D are correct.
27) The return to entrepreneurship is known as
A) economic profit.
B) normal profit.
C) opportunity revenue.
D) normal revenue.
E) explicit profit.
28) A normal profit is defined as
A) total revenue minus explicit costs.
B) the same thing as accounting profit.
C) the return to entrepreneurship.
D) total revenue minus implicit costs.
E) the economic profit minus the implicit costs.
29) Normal profit is
A) part of the firm’s opportunity costs.
B) the same as economic profits.
C) part of the firm’s explicit costs.
D) Answer A and answer B are correct.
E) Answer A and answer C are correct.
30) A normal profit is
A) part of a firm’s opportunity cost.
B) equal to total revenue minus total opportunity cost.
C) the same as economic profit.
D) the same as accounting profit.
E) almost always zero if the company is run efficiently.
31) A firm’s total revenue minus its total opportunity cost is called its
A) accounting profit.
B) normal profit.
C) economic profit.
D) abnormal profit.
E) entrepreneur’s profit.
32) Economic profit equals total revenue minus total
A) explicit costs.
B) opportunity costs.
C) implicit costs.
D) accounting costs.
E) entrepreneur’s costs.
33) Which of the following is true?
A) Profit as calculated by accountants and economic profit are not necessarily equal.
B) Profit as calculated by accountants is always smaller than economic profit.
C) Economic profit ignores implicit costs.
D) The Internal Revenue Service taxes the firm’s economic profit but not its normal profit.
E) The Internal Revenue Service taxes the firm’s normal profit but not its economic profit.
34) April quit her job as an accountant at Ernst and Young, where she was paid $45,000 per year.
She started her own landscaping business. She rents machines and tools for $50,000 and pays
$10,000 as wages to her help. These are her only costs. April earned total revenue of $100,000.
A) Her accountant calculates her profit as $40,000.
B) She has an economic loss.
C) Her explicit cost is $105,000.
D) Both answers A and B are correct.
E) Both answers A and C are correct.
35) Jennifer owns a pig farm near Salina, Kansas. Last year she earned $39,000 in total revenue
while incurring $38,000 in explicit costs. She could have earned $27,000 as a teacher in Salina.
These are all her revenue and costs. Therefore Jennifer earned an
A) accounting profit of $1,000 but incurred an economic loss of $26,000.
B) accounting profit of $1,000 but incurred an economic loss of $65,000.
C) accounting profit of $1,000 but incurred an economic loss of $38,000.
D) economic profit of $1,000.
E) None of the above answers is correct.
36) Suppose a firm’s total revenue is $1,000,000. The firm has incurred explicit costs of
$750,000. There is also $50,000 of forgone wages by the owner, $10,000 of forgone interest by
the owner, $3,000 worth of economic depreciation, and $20,000 worth of normal profit. What is
the firm’s economic profit?
A) $250,000
B) $200,000
C) $190,000
D) $167,000
E) $180,000
37) Dr. Khan starts his own dental practice after quitting his $150,000 job at The Mall Dental
Clinic. His revenues for the first year are $500,000. He paid $90,000 in rent for the dental office,
$60,000 for his office manager’s salary, $24,000 for the dental hygienist, $150,000 for insurance,
and $6,000 for other miscellaneous costs. The normal profit from running his business is
$20,000.
A) His accounting profit is $350,000.
B) His economic profit is $150,000.
C) His economic profit is zero.
D) His accounting profit is zero.
E) None of the above answers are correct.
38) Dr. Khan starts his own dental practice after quitting his $150,000 job at The Mall Dental
Clinic. His revenues for the first year are $500,000. He paid $90,000 in rent for the dental office,
$60,000 for his office manager’s salary, $24,000 for the dental hygienist, $150,000 for insurance,
and $6,000 for other miscellaneous costs. The normal profit from running his business is
$20,000.
A) His explicit costs are $330,000.
B) His implicit costs are $170,000.
C) His economic profit is zero.
D) Only answer A and answer C are correct.
E) Answer A, answer B, and answer C are correct.
39) Suppose that a firm earned $500,000 in total revenue. At the same time, it incurred labor
costs of $200,000; economic depreciation of $50,000; normal profit of $75,000; interest paid to
the bank of $25,000; and used other factors of production that cost $100,000. The economic
profit earned by the firm equals
A) $275,000.
B) $175,000.
C) $50,000.
D) $200,000.
E) $500,000.
40) Bill is an economics professor who earns $40,000 teaching but decides to leave and fulfill his
dream of catering barbecues. During his first year of barbecuing he earned total revenue of
$60,000. He spent $30,000 on food and supplies. He also paid his wife $10,000 to help serve
food. The normal profit for an entrepreneur running a barbecue business is $3,000. He also
rented an industrial grill/fry truck for $12,000. An accountant would conclude that Bill’s profit
was
A) $30,000.
B) $20,000.
C) $8,000.
D) -$2,000.
E) $40,000.
41) Bill is an economics professor who earns $37,000 teaching but decides to leave and fulfill his
dream of catering barbecues. During his year of barbecuing he earned total revenue of $60,000.
He spent $30,000 on food and supplies. He also paid his wife $10,000 to help serve food. The
normal profit for an entrepreneur running a barbecue business is $3,000. Bill also rented an
industrial grill/fry truck for $12,000. Bill had an economic
A) profit of $20,000.
B) loss of -$32,000.
C) loss of -$42,000.
D) profit of $28,000.
E) profit of zero.
42) The paramount goal of a firm is to
A) maximize profit.
B) maximize sales.
C) maximize total revenue.
D) minimize costs.
E) force its competitors into bankruptcy.
43) For a business, opportunity cost measures
A) only the cost of labor and materials.
B) only the implicit costs of the business.
C) the cost of all the factors of production the firm employs.
D) only the explicit costs the firm must pay.
E) all of the firm’s costs including its normal profit and its economic profit.
44) Costs paid in money to hire a resource is
A) normal profit.
B) an implicit cost.
C) an explicit cost.
D) an alternative-use cost.
E) economic profit.
45) Which of the following is an example of an implicit cost?
A) wages paid to employees
B) interest paid to a bank on a building loan
C) the cost of using capital an owner donates to the business
D) dollars paid to a supplier for materials used in production
E) liability insurance payments made only once a year
46) The opportunity cost of a firm using its own capital is
A) economic depreciation.
B) self ownership depreciation.
C) economic loss.
D) normal loss.
E) capital loss.
47) The difference between a firm’s total revenue and its total cost is its ________ profit.
A) explicit
B) normal
C) economic
D) accounting
E) excess
1) The short run is the time frame
A) during which the quantities of all resources are fixed.
B) that is less than a year.
C) during which the quantities of some resources are fixed.
D) during which the quantities of all resources are variable.
E) during which all costs are implicit costs.
2) The short run is
A) less than one year.
B) the time frame in which all resources are fixed.
C) the time frame in which some resources are fixed.
D) the time frame in which output is fixed.
E) a time frame short enough so that some costs are explicit costs.
3) The short run is a time period that is
A) equal to a day.
B) too short to change the amount of labor hired.
C) too short to change the size of the firm’s plant.
D) long enough to change the size of the firm’s plant.
E) too short to change the amount of any resource the firm employs.
4) To produce more output in the short run, a firm must employ more of
A) all its resources.
B) its fixed resources.
C) its variable resources.
D) the least costly resources regardless of whether they are fixed or variable.
E) Firms cannot produce more output in the short run.
5) Which of the following is a list of fixed inputs for a hospital?
A) bandages, casts, and other materials
B) antibiotics, pain medication, and other prescription drugs
C) the emergency room, intensive care unit, and other facilities
D) the nurses, receptionists, and other employees
E) the lobby, the doctors, and the electricity it uses
6) The long run is a time period that is
A) five years or longer.
B) long enough to change the amount of labor employed.
C) long enough to change the size of the firm’s plant and all other inputs.
D) long enough to change the amount of labor employed but not to change the size of the plant.
E) None of the above answers describe the long run.
7) The long run is defined as
A) any time after six months.
B) any time after one year.
C) the period of time when all resources are fixed.
D) the period of time when most (more than 50 percent) resources are variable.
E) the period of time when all resources are variable.
8) The long run is a time period in which
A) some of the firm’s resources are fixed.
B) all of the firm’s resources are fixed.
C) all of the firm’s resources are variable.
D) the firm cannot increase its output.
E) all costs become explicit costs.
9) In the long run,
A) some resources are fixed.
B) all resources are variable.
C) output cannot be varied.
D) all resources are fixed.
E) Both answers B and C are correct.
10) In the long run, the firm ________ change the number of workers it employs and ________
change the size of its plant.
A) can; can
B) can; cannot
C) cannot; can
D) cannot; cannot
E) In order to answer the question more information is needed about how long is the long run.
11) The total product curve shows the relationship between total product and
A) cost.
B) the quantity of labor.
C) the average product.
D) the marginal product.
E) the marginal cost.