Chapter 08 Test Bank Key
1. Which of the following is the best explanation for why individuals own small businesses?
A. Because they cannot earn a living working for corporate America.
2. Economists assume the principal motivation of producers is
3. Profit
4. The profit motive can encourage businesses to do all of the following except
A. Pollute the environment.
5. The best measure of the economic cost of doing your homework is
6. All of the following are ways a business can earn economic profits except
7. In defining economic costs, economists emphasize
8. Explicit costs
9. Implicit costs
10. Accounting costs and economic costs differ because
A. Accounting costs exceed economic costs whenever any factor is not paid an explicit wage.
11. Economic profit is
12. Economic profit is the difference between
A. Accounting profits and external costs.
13. A firm that makes zero economic profits
14. Normal profit
15. Normal profit implies that
16. Which of the following should not be included when calculating accounting profit?
17. Greater-than-normal profit represents
18.
The accounting profit is equal to
19.
Suppose the entrepreneur could earn $1,000 as an employee elsewhere. This means the
economic profit is
20.
Suppose the entrepreneur could earn $1,000 as an employee elsewhere. This means the
accounting profit is
21.
Suppose the entrepreneur could earn $800 as an employee elsewhere. This means the
entrepreneur is earning
22. The $600 paid in property taxes counts as
23. Assuming the entrepreneur does not pay herself, the $1,000 she could earn as an employee
elsewhere is considered
24. Adam Weed is the owner/operator of a flower shop. Last year he earned $250,000 in total
revenue. His explicit costs were $175,000 paid to his employees and suppliers (assume that
this amount represents the total opportunity cost of these resources). During the year he
received three offers to work for other flower shops with the highest offer being $75,000 per
year. Which of the following is true about Adam’s accounting and economic profit?
25. Lashondra is the owner/operator of an interior design firm. Last year she earned $400,000 in
total revenue. Her explicit costs were $200,000 (assume that this amount represents the total
opportunity cost of these resources). During the year she received offers to work for other
design firms. One offer would have paid her $120,000 per year and the other would have
paid her $130,000 per year. Lashondra’s economic profit is equal to
26. Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in
materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest
costs on capital. The owner/manager does not choose to pay himself, but he could receive
income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year.
What are the annual explicit costs for the firm described above?
27. Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in
materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest
costs on capital. The owner/manager does not choose to pay himself, but he could receive
income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year.
What are the annual implicit costs for the firm described above?
28. Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in
materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest
costs on capital. The owner/manager does not choose to pay himself, but he could receive
income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year.
What are the annual economic costs for the firm described above?
29. Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in
materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest
costs on capital. The owner/manager does not choose to pay himself, but he could receive
income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year.
What is the accounting profit for the firm described above?
30. Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in
materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest
costs on capital. The owner/manager does not choose to pay himself, but he could receive
income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year.
What is the economic profit for the firm described above?
31. Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in
materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest
costs on capital. The owner/manager does not choose to pay himself, but he could receive
income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. To
receive a normal profit, the firm described above would have to
32. Entrepreneurship
33. Megan used to work at the local pizzeria for $15,000 per year but quit to start her own deli.
To buy the necessary equipment, she withdrew $20,000 from her inheritance (which paid 8
percent interest). Last year she paid $25,000 for ingredients and $500 per month rent but
had revenue of $50,000. She asked her dad the accountant and her mom the economist to
calculate her annual profit for her.
34. A monopoly occurs when
35. Market structure is determined by the
A. Annual revenue, costs, and profits for an industry.
36. The perfectly competitive market structure includes all of the following except
37. Perfect competition is a situation in which
38. When a producer can control the market price for the good it sells, the producer
39. If a firm can change market prices by altering its output, then it
40. In which of the following types of markets does a single firm have the most market power?
41. A perfectly competitive firm is a price taker because
42. A competitive firm
43. In order to sell additional units of their products, competitive firms must
44. Competitive firms cannot individually affect market price because
A. There is an infinite demand for their goods.
45. The market price for T-shirts sold in a perfectly competitive market is determined by
46. If the equilibrium price in a perfectly competitive market for walnuts is $4.99 per pound, then
an individual firm in this market can
47. Which of the following characterizes a competitive market?
A. A downward-sloping demand curve for the firm.
48. The demand curve for each perfectly competitive firm is
49. Which of the following industries is perfectly competitive?
50. The demand curve confronting a competitive firm is
51. The demand curve confronting a competitive firm
52. Which of the following is a production decision?
A. How much output the firm should produce in the long run.
53. A production decision involves choosing
54. In making a production decision, an entrepreneur
55. A firm’s total revenue can be determined by
56. The fact that a perfectly competitive firm’s total revenue curve is an upward-sloping straight
line implies that
57. If a perfectly competitive firm wanted to maximize its total revenues, it would produce
58. The short run is the time period
A. Over which an investment decision can be made.
59. Fixed costs
A. Increase with the level of production in the short run.
60. A firm maximizes total profit when
61. Which of the following is generally a fixed cost?
62. Which of the following represents the change in total cost that results from a one-unit
increase in production?
Topic: THE PRODUCTION DECISION
63. When the short-run marginal cost curve is upward-sloping,
64. If diminishing returns exist, then
65. The difference between the total revenue and total cost curves at a given output is equal
to
66.
Refer to the data in Figure 22.1. The total fixed costs for this firm are approximately