Survey of Economics, 6e (O’Sullivan/Sheffrin/Perez)
Chapter 5 Production Technology and Cost
5.1 Economic Cost and Economic Profit
1) In the short run, ________ factors of production are fixed, while in the long run, ________ of
them are.
A) some; none
B) all; none
C) no; at least some
D) all; at least some
2) Which of the following is a short-run adjustment?
A) Three new firms enter the computer chip industry.
B) A firm hires six new workers.
C) The number of farms in Kansas increases by 10%.
D) A firm opens two new plants.
3) Which of the following is a long-run adjustment?
A) A firm lays off two workers.
B) Two firms exit the asbestos removal industry.
C) A manufacturer increases its purchase of raw materials.
D) A farmer buys twice her usual amount of herbicide.
4) Which of the following is a long-run adjustment?
A) A firm hires two new workers.
B) The number of professional baseball teams increases by two.
C) GM buys more steel for its auto plants in Michigan.
D) A farmer buys twice her usual amount of fertilizer.
5) In the short run
A) firms have the ability to enter or exit the industry.
B) firms are able to alter some, but not all, of their factors of production.
C) firms are unable to adjust their output choices.
D) None of the above is correct.
6) In the long run
A) firms have the ability to enter or exit the industry.
B) firms are able to alter some, but not all, of their resources.
C) firms are unable to adjust their output choices.
D) None of the above is correct.
7) In the long run
A) all factors of production are fixed.
B) all factors of production are variable.
C) some factors of production are variable, while at least one factor of production is fixed.
D) None of the above is correct.
8) In the short run
A) all factors of production are fixed.
B) all factors of production are variable.
C) some factors of production are variable, while at least one factor of production is fixed.
D) None of the above is correct.
9) ________ are costs that do not require a monetary payment.
A) Implicit costs
B) Explicit costs
C) Accounting costs
D) All opportunity costs
10) ________ are costs that require a monetary payment.
A) Implicit costs
B) Explicit costs
C) Accounting costs
D) B and C are correct.
11) Which of the following are included in calculating economic costs?
A) implicit costs
B) explicit costs
C) accounting costs
D) All of the above are correct.
12) Accountants include ________ costs as part of a firm’s costs, while economists include
________ costs.
A) explicit; no explicit
B) implicit; no implicit
C) explicit and implicit; implicit
D) explicit; explicit and implicit
13) Which of the following statements is incorrect?
A) A firm’s total economic cost is at least as large as the firm’s total accounting cost.
B) A firm’s total economic cost includes both explicit cost and implicit cost of the firm.
C) A firm’s implicit cost is the opportunity cost of non-purchased inputs.
D) A firm’s total accounting cost is at least as large as the firm’s implicit cost.
14) Joe runs a restaurant. He pays his employees $200,000 per year. His ingredients cost him
$50,000 per year. Prior to running his restaurant, Joe was a lawyer earning $150,000 per year.
What would economists say is Joe’s cost of running the restaurant?
A) $150,000
B) $200,000
C) $250,000
D) $400,000
15) You are a student at a university. You pay $8,000 per year in tuition, $5,000 per year in
living expenses, and $1,000 per year for books. Were you not in school, you could earn $15,000
per year and you would not live with your parents. What is your economic cost of a year in
college?
A) $9,000
B) $15,000
C) $24,000
D) $29,000
16) Jane is a student at a university. She pays $10,000 per year in tuition, $4,000 per year in
living expenses, and $800 per year for books. Were she not in school, she could earn $20,000 per
year working as a bookkeeper and she would not live with her parents. What is her economic
cost of a year in college?
A) $10,000
B) $13,000
C) $30,800
D) $34,800
17) Which of the following is an example of something that economists would consider a cost
but accountants would not?
A) the cost of materials and supplies purchased by a firm
B) the salary that the firm actually pays to the firm’s owner
C) the interest income foregone by the firm’s owner because the owner invested funds into the
firm
D) the cost of advertising
18) Which of the following is an example of something that economists would consider a cost
but accountants would not?
A) the wages paid to employees of a firm
B) the wages that the owner of a firm could have earned in some alternative job
C) rent paid to a business’ landlord
D) the cost of leather used in the production of footballs
19) An example of an implicit cost is
A) the wages paid to workers.
B) the interest on business loans.
C) the imputed rent on a store owned by the firm.
D) the materials used to produce the product.
Recall the Application about the opportunity cost of starting a new business to answer the
following question(s).
20) Recall the Application. According to a study of Canadian workers, the ________ a worker’s
earnings in paid employment, the more likely the worker was to become an entrepreneur because
the opportunity cost of that worker leaving a job and starting a business is ________.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower
21) Recall the Application. For many entrepreneurs, starting a new business means leaving paid
employment. The pay given up by the entrepreneur when starting a new business is an example
of ________ for that entrepreneur.
A) an explicit cost
B) an implicit cost
C) both an explicit and an implicit cost
D) neither an explicit cost nor an implicit cost
22) Economic cost differs from accounting cost because accountants do not consider implicit
costs.
23) Economic profit is total revenue less economic costs.
24) Since all costs positive, then economic profits would always be smaller than accounting
profits.
25) Economic cost is always less than accounting cost.
26) Implicit cost is the opportunity cost of the inputs that do not require monetary payment.
27) The interest on a business loan is an implicit cost.
28) What are the differences between economic cost and accounting costs?
29) What is economic profit?
30) What are the explicit and implicit cost?
31) Can a firm’s accounting profit be smaller than the economic profit? Assume that all costs are
positive.
32) Explain the difference between the short run and the long run.
33) Explain the relationship between average fixed cost and marginal cost.
34) Explain the difference between fixed costs in the short run and in the long run.
5.2 A Firm with a Fixed Production Facility: Short-Run Costs
1) Diminishing marginal returns implies that
A) marginal costs are decreasing.
B) marginal costs are increasing.
C) marginal costs are constant.
D) marginal costs may be increasing or decreasing.
2) Diminishing marginal returns implies that
A) marginal product is decreasing.
B) marginal product is increasing.
C) marginal product is constant.
D) marginal product may be increasing or decreasing.
3) A firm experiences diminishing marginal returns because
A) all factors of production are variable.
B) people “learn by doing.”
C) all factors of production are fixed.
D) at least one factor of production is fixed.
4) In the short run, at least one factor of production is fixed. This implies that beyond some level
of output a firm will
A) “learn by doing.”
B) experience diminishing marginal returns.
C) experience increasing marginal returns.
D) have a U-shaped long-run average cost curve.
5) Which of the following is NOT true when the firm experiences diminishing marginal product?
A) The total product is decreasing.
B) The marginal product of the previous worker is higher than the current worker.
C) The firm is operating in the short run.
D) The firm’s total cost is increasing.
6) Diminishing marginal returns implies that firms
A) require fewer and fewer workers to produce each additional unit of output.
B) require more and more workers to produce each additional unit of output.
C) get decreasing amounts of revenue for each unit of output they produce.
D) get increasing amounts of revenue for each unit of output they produce.
7) When at least one factor of production is fixed, firms require more and more workers to
produce each additional unit of output. This describes
A) increasing marginal returns.
B) diminishing marginal returns.
C) learning by doing.
D) short-run adjustments.
Number of workers
Units of
output
0
0
1
10
2
30
3
44
4
55
Table 5.1
8) Refer to Table 5.1, which gives a firm’s production function. Assume that all non-labor inputs
are fixed. Diminishing marginal returns set in with the addition of the
A) third worker.
B) fourth worker.
C) fifth worker.
D) sixth worker.
9) Refer to Table 5.1, which gives a firm’s production function. Assume that all non-labor inputs
are fixed. The marginal product of the fourth worker is
A) 12 units.
B) 11 units.
C) 5 units.
D) 0 units.
10) Refer to Table 5.1, which gives a firm’s production function. Assume that all non-labor
inputs are fixed. Marginal product is maximized when the firm hires
A) 2 workers.
B) 3 workers.
C) 4 workers.
D) 5 workers.
Number of
workers
Units of
output
0
0
1
25
2
55
3
95
4
125
5
150
Table 5.2
11) Refer to Table 5.2, which gives a firm’s production function. Assume that all non-labor
inputs are fixed. Diminishing returns set in with the addition of the
A) third worker.
B) fourth worker.
C) fifth worker.
D) sixth worker.
12) Refer to Table 5.2, which gives a firm’s production function. Assume that all non-labor
inputs are fixed. The marginal product is maximized when the firm hires
A) 2 workers.
B) 3 workers.
C) 4 workers.
D) 5 workers.
13) Refer to Table 5.2, which gives a firm’s production function. Assume that all non-labor
inputs are fixed. The marginal product of the fifth worker is
A) 0 units.
B) 10 units.
C) 25 units.
D) 30 units.
14) Refer to Table 5.2, which gives a firm’s production function. Assume that all non-labor
inputs are fixed. The marginal product of the fourth worker is
A) 0 units.
B) 10 units.
C) 25 units.
D) 30 units.
15) Marginal product in the short run
A) increases at all levels of production.
B) diminishes at all levels of production.
C) may initially increase, then eventually decrease.
D) may initially decrease, then eventually increase.
16) Marginal product is defined as the change in ________ resulting from a one-unit increase in
________.
A) total product; input
B) total product; output
C) output; total product
D) total cost; output
17) In the short run, the firm’s total cost equals
A) the total fixed costs + the total variable costs.
B) the average fixed costs + average variable costs.
C) the average fixed cost + the marginal cost.
D) the total variable costs only.
18) ________ is a cost that independent of the quantity produced by the firm and is incurred by
the firm in the short run.
A) Fixed cost
B) Economic cost
C) Variable cost
D) Average total cost
19) ________ is a cost that changes with the quantity produced by the firm and is incurred by the
firm in the short run.
A) Fixed cost
B) Economic cost
C) Variable cost
D) Average total cost
Figure 5.4
20) One can tell that Figure 5.4 shows short run costs because
A) the slope of total costs and variable costs are the same.
B) costs are rising.
C) total costs are positive when output is zero implying fixed costs.
D) all of the above.
21) In Figure 5.4, the difference between total costs and variable cost is
A) average total cost.
B) fixed cost.
C) total costs are positive when output is zero implying fixed costs.
D) all of the above.
22) Average variable cost is defined as
A) total variable cost divided by quantity.
B) quantity divided by total variable cost.
C) the change in total variable cost divided by the change in quantity.
D) the change in quantity divided by the change in total variable cost.
23) Average fixed cost is defined as
A) total variable cost divided by quantity.
B) quantity divided by total variable cost.
C) the change in total variable cost divided by the change in quantity.
D) total fixed cost divided by quantity.
24) Average total cost is defined as
A) total variable cost divided by quantity.
B) quantity divided by total variable cost.
C) the change in total variable cost divided by the change in quantity.
D) total cost divided by quantity.
25) Average total cost equals
A) total fixed cost plus total variable cost.
B) average fixed cost minus average variable cost.
C) average fixed cost plus average variable cost.
D) total cost minus average cost.
26) Average variable cost equals
A) total fixed cost plus total variable cost.
B) average total cost minus average fixed cost.
C) average total cost plus average fixed cost.
D) total cost minus average cost.
27) Mark’s Baseballs produces baseballs. Mark’s Baseballs has total fixed costs of $500. Mark’s
average variable cost is $20, and his average total cost is $25. Mark is currently producing
A) 5 baseballs.
B) 25 baseballs.
C) 100 baseballs.
D) a number of baseballs that cannot be determined from the information provided.