The Costs of Production
Multiple Choice – Section 00: Introduction
1. Analyzing the behavior of the firm enhances our understanding of
a. what decisions lie behind the market supply curve.
b. how consumers allocate their income to purchase scarce resources.
c. how financial institutions set interest rates.
d. whether resources are allocated fairly.
2. A student might describe information about the costs of production as
a. dry and technical.
b. boring.
c. crucial to understanding firms and market structures.
d. All of the above could be correct.
3184 The Costs of Production
3. Which field of economics studies how the number of firms affects the prices in a market and the
efficiency of market outcomes?
a. macroeconomics
b. industrial organization
c. labor economics
d. monetary economics
4. Economists in the field of industrial organization study how
a. central banking policies affect financial markets.
b. firms’ demand for labor and individuals’ supply of labor affect resource markets.
c. firms’ decisions about prices and quantities depend on market conditions.
d. externalities and public goods affect the environment.
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5. Industrial organization is the study of
a. how labor unions organize workers in industries.
b. which managers are the most successful.
c. how industries organize for political advantage.
d. how firms’ decisions regarding prices and quantities depend on the market conditions they face.
6. 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 diminishing marginal productivities of their inputs?
c. How does the number of firms affect prices and the efficiency of market outcomes?
d. How can government intervention improve industrial production when externalities are present?
3186 The Costs of Production
Multiple Choice – Section 01: What Are Costs?
1. Economists assume that the typical person who starts her own business does so with the intention
of
a. donating the profits from her business to charity.
b. capturing the highest number of sales in her industry.
c. maximizing profits.
d. minimizing costs.
2. Economists normally assume that the goal of a firm is to
(i) sell as much of its product as possible.
(ii) set the price of the product as high as possible.
(iii) maximize profit.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (iii) only
d. (i), (ii), and (iii)
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3. Economists normally assume that the goal of a firm is to earn
(i) profits as large as possible, even if it means reducing output.
(ii) profits as large as possible, even if it means incurring a higher total cost.
(iii) revenues as large as possible, even if it reduces profits.
a. (i) and (ii) only
b. (i) and (iii) only
c. (ii) and (iii) only
d. (i), (ii), and (iii)
4. Economists normally assume that the goal of a firm is to
(i) earn profits as large as possible, even if it means reducing output.
(ii) earn revenues as large as possible, even if it means reducing profits.
(iii) minimize costs, regardless of profits.
a. (i) only
b. (i) and (ii) only
c. (ii) and (iii) only
d. (i), (ii), and (iii)
3188 The Costs of Production
5. An entrepreneur’s motivation 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 could be correct.
6. 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.
7. Economists assume that the goal of the firm is to maximize total
a. revenue.
b. profits.
c. costs.
d. satisfaction.
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8. 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.
9. 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.
3190 The Costs of Production
10. Total revenue equals
a. price x quantity.
b. price/quantity.
c. (price x quantity) – total cost.
d. output – input.
11. Total revenue equals
a. marginal revenue – marginal cost.
b. price/quantity.
c. price x quantity.
d. output – input.
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12. 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
13. If Danielle sells 300 wrist bands for $0.50 each, her total revenues are
a. $150.
b. $299.50.
c. $300.
d. $600.
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14. If Kevin’s children run a lemonade stand for a day and sell 200 glasses of lemonade at $0.50
each, their total revenues are
a. $100.
b. $199.50.
c. $200.
d. $400.
15. Carol Anne makes candles. If she charges $20 for each candle, her total revenue will be
a. $1,000 if she sells 100 candles.
b. $500 if she sells 25 candles.
c. $20 regardless of how many candles she sells.
d. $200 if she sells 5 candles.
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16. The Carolina Christmas Tree Corporation grows and sells 500 Christmas trees. The average cost
of production per tree is $50. Each tree sells for a price of $65. The Carolina Christmas Tree
Corporation’s total revenues are
a. $7,500.
b. $25,000.
c. $32,500.
d. $67,500.
17. Tsintah weaves traditional Navaho rugs. She weaves and sells 50 rugs. Her average cost of
production per rug is $50. She sells each rug for a price of $65. Tsintah’s total revenues are
a. $750.
b. $2,500.
c. $3,250.
d. $5,750.
3194 The Costs of Production
18. The Three Amigo’s company produced and sold 500 dog beds. The average cost of production
per dog bed was $50. Each dog be sold for a price of $65. The Three Amigo’s total costs are
a. $7,500.
b. $25,000.
c. $32,500.
d. $67,500.
19. Trevor’s Tire Company produced and sold 500 tires. The average cost of production per tire was
$50. Each tire sold for a price of $65. Trevor’s Tire Company’s total profits are
a. $7,500.
b. $25,000.
c. $32,500.
d. $67,500.
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20. Stick Storage manufactures and sells computer flash drives. Last year it sold 2 million flash drives
at a price of $10 each. For last year, the firm’s
a. accounting profit was $20 million.
b. economic profit was $20 million.
c. total revenue was $20 million.
d. explicit costs was $20 million.
21. Shelley’s Salsa produces and sells organic salsa. Last year it sold 3 million tubs of salsa at a price
of $3 per tub. For last year, the firm’s
a. accounting profit was $9 million.
b. economic profit was $9 million.
c. total revenue was $9 million.
d. explicit costs were $9 million.
3196 The Costs of Production
22. A dairy produces and sells organic milk. Last year it sold 500,000 gallons of milk at a price of $7
per gallon. For last year, the firm’s
a. total revenue was $3.5 million.
b. economic profit was $3.5 million.
c. accounting profit was $3.5 million.
d. explicit costs were $3.5 million.
23. Bubba is a shrimp fisherman who catches 4,000 pounds of shrimp per year. He can sell the shrimp
for $5 per pound. His average total cost of catching shrimp is $3 per pound. Bubba’s annual total
revenue is
a. $8,000.
b. $12,000.
c. $20,000.
d. $32,000.
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24. 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.
25. Total cost is the
a. amount a firm receives for the sale of its output.
b. fixed cost less variable cost.
c. market value of the inputs a firm uses in production.
d. quantity of output minus the quantity of inputs used to make a good.
26. 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.
3198 The Costs of Production
27. Profit is defined as total revenue
a. plus total cost.
b. times total cost.
c. minus total cost.
d. divided by total cost.
28. Marcus sells 300 candy bars at $0.50 each. His total costs are $125. His profits are
a. $25.
b. $124.50.
c. $125.
d. $150.
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29. Ryan sells 200 plastic ball point pens at $0.50 each. His total costs are $25. His profits are
a. $25.
b. $75.
c. $100.
d. $175.
30. Billy’s Bean Bag Emporium produced 300 bean bag chairs but sold only 275 of the units it
produced. The average cost of production for each unit of output produced was $100. The price
for each of the 275 units sold was $95. Total profit for Billy’s Bean Bag Emporium would be
a. –$3,875.
b. $26,125.
c. $28,500.
d. $30,000.
3200 The Costs of Production
31. The things that must be forgone to acquire a good are called
a. implicit costs.
b. opportunity costs.
c. explicit costs.
d. accounting costs.
32. A firm’s opportunity costs of production are equal to its
a. explicit costs only.
b. implicit costs only.
c. explicit costs + implicit costs.
d. explicit costs + implicit costs + total revenue.
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33. Jamar used to work as an office manager, earning $40,000 per year. He gave up that job to start a
life-coaching business. In calculating the economic profit of his life–coaching business, the $40,000
income that he gave up is counted as part of the life-coaching business’s
a. total revenue.
b. opportunity costs.
c. explicit costs.
d. marginal costs.
34. Kelly has decided to start his own business giving sailing lessons. To purchase equipment for the
business, Kelly withdrew $1,000 from his savings account, which was earning 3% interest, and
borrowed an additional $2,000 from the bank at an interest rate of 7%. What is Kelly’s annual
opportunity cost of the financial capital that has been invested in the business?
a. $30
b. $140
c. $170
d. $300
3202 The Costs of Production
35. Gwen has decided to start her own photography studio. To purchase the necessary equipment,
Gwen withdrew $2,000 from her savings account, which was earning 3% interest, and borrowed
an additional $4,000 from the bank at an interest rate of 7%. What is Gwen’s annual opportunity
cost of the financial capital that has been invested in the business?
a. $60
b. $280
c. $340
d. $660
36. Anya has decided to start her own hair-styling salon. To purchase the necessary equipment,
Anya withdrew $10,000 from her savings account, which was earning 3% interest, and borrowed
an additional $5,000 from the bank at an interest rate of 8%. What is Anya’s annual opportunity
cost of the financial capital that has been invested in the business?
a. $300
b. $400
c. $700
d. $1,650