11) One of the reasons that a firm can be ________ efficient than a market is that the firm
________.
A) more; does not have any economies of scale
B) more; lowers transactions costs
C) less; has economies of scope
D) less; produces lower profits
12) Kris wants to purchase a house. She buys newspapers to read the classified advertisements
and spends her evenings with realtors looking at houses. Kris has incurred the ________ costs of
making a purchase.
A) transactions
B) market
C) buying
D) scale
13) When the cost of producing a unit of a good decreases as its output rate increases, there are
economies of
A) scale.
B) scope.
C) production.
D) size.
14) “When the cost of producing a unit of a good falls as its output rate increases” is the
definition of
A) economies of scope.
B) economies of scale.
C) economic efficiency.
D) technological efficiency.
15) Economies of scale exist when the
A) total cost of production falls as the output increases.
B) cost of producing a unit of a good falls as its output decreases.
C) cost of producing a unit of a good falls as its output increases.
D) firm uses specialized resources to produce a range of goods and services.
16) Economies of scale exist when the ________ a unit of a good ________.
A) average cost of producing; falls as its output rate increases
B) price; falls as its input rate decreases
C) price; rises as its output rate increases
D) average cost of producing; rises as its input rate increases
17) ________ coordinate economic activity in which there are substantial ________.
A) Markets; team production efficiencies
B) Markets; transactions costs
C) Firms; economies of scale
D) Firms; principal-agent problems
18) If Quick Auto Service increases the size of its shop, enabling it to purchase cost-saving
capital equipment so that the cost of servicing a car falls, this would be an example of
A) economies of scope.
B) economies of scale.
C) monitoring.
D) increasing transactions costs.
19) When Jitters Coffee Company, Inc., can lower the cost of packaging a pound of coffee by
doubling the quantity packaged each day, it is achieving
A) economies of scale.
B) economies of scope.
C) economies of team production.
D) all of the above
20) When Fatz confectionery can lower the cost of manufacturing and packaging a pound of
candy by doubling the quantity manufactured and packaged each day, it will achieve
A) economies of scope.
B) economies of scale.
C) economies of team production.
D) all of the above
21) “When the cost of producing a unit of a good falls because the firm uses specialized
resources to produce a range of goods and services” is the definition of
A) economies of scope.
B) economies of scale.
C) economic efficiency.
D) technological efficiency.
22) Economies of scope are cost reductions achieved by
A) the production of multiple, related products.
B) the production of large amounts of a single product.
C) limiting the size of the firm.
D) increasing firm size.
23) A firm finds that it can produce several different goods at a lower average cost by using
some of the same production facilities than it could if it produced each of the goods with separate
production facilities. This firm is
A) gaining economies of scope.
B) gaining economies of team production.
C) gaining economies of scale.
D) incurring diseconomies of scale.
24) Which of the following best defines “economies of scope”?
A) As output expands the cost of producing a good decreases.
B) As output expands the cost of producing a unit of a good decreases.
C) Because firms use specialized resources to produce a range of goods, as the number of
products produced increases, the cost of producing a unit decreases.
D) Costs increase as firms seek to find more consumers.
25) If a firm that repairs both motorcycles and cars is able to do so at a lower cost than a firm
that does only one or the other, this would be an example of
A) economies of scope.
B) economies of scale.
C) monitoring.
D) increasing transactions costs.
26) Economies of scope exist when
A) the total cost of production falls as the output increases.
B) a firm hires specialized resources to produce a range of goods and services.
C) a firm uses outsourcing to produce a good or service.
D) the cost of producing a unit of a good falls as its output increases.
27) Taco Bell produces both tacos and burritos because when it does so, Taco Bell experiences
A) economies of scope.
B) decreasing scope of costs.
C) increasing normal profit.
D) economies of scale.
28) Team production is a production process in which
A) pay is based on group output.
B) individuals specialize in mutually supportive tasks.
C) competing groups perform identical tasks.
D) individuals rotate from one task to another.
29) A firm with a sales department, a production department, and a marketing department
provides an example of
A) team production.
B) joint production.
C) economies of scale.
D) economies of different departments.
30) Economies of team production exist when the
A) average cost of producing a unit of a good falls as its output rate increases.
B) firm buys parts or products from other firms.
C) firm uses specialized resources to produce a range of goods and services.
D) individuals in a group specialize in mutually supportive tasks in the production process.
31) Quick Auto Service will do oil changes. If each oil change is done by five people, each of
whom specializes in one task, this is an example of
A) economies of scope.
B) team production.
C) economies of monitoring.
D) economies of coordination.
32) Joe’s Pizza Shop only makes pizza. If each pizza requires five people, each of whom
specializes in one task, this method of production is an example of
A) economies of scope.
B) team production.
C) economies of monitoring.
D) economies of coordination.
33) Which of the following may yield economies of team production for Jitters Coffee Company,
Inc.?
A) dividing the process of packaging and shipping coffee into several specialized tasks, each
performed by different people
B) expanding into a larger coffee packaging plant
C) expanding into the packaging and sale of tea and powdered chocolate
D) all of the above
6 News Based Questions
1) U.S. auto sales took a beating in September 2008 as the nation’s worsening economy turned
dealer showrooms into ghost towns. Automakers reported a sharp drop-off in sales in the last ten
days of the month as news of bank failures and a stock market meltdown increased economic
uncertainty. What type of constraint do the automakers face when there is increased economic
uncertainty?
A) information constraint
B) technology constraint
C) marketmconstraint
D) price constraint
2) Suppose Angelo Sessa, owner of Sezz Medi Brick Oven Pizza in NYC, earns $350,000 in
revenue per year. He spends $800 a month on ash wood for his stove, $2000 a month on rent,
and $1500 a month on ingredients. He used to be a lawyer and earned $240,000 a year before he
opened up Sezz Medi. Normal profit for a pizza business is $30,000. What is Angelo’s
opportunity cost of production?
A) $350,000
B) $312,600
C) $288,000
D) $321,600
3) Suppose Angelo Sessa, owner of Sezz Medi Brick Oven Pizza in NYC, earns $350,000 in
revenue per year. He spends $800 a month on ash wood for his stove, $2000 a month on rent,
and $1500 a month on ingredients. He used to be a lawyer and earned $240,000 a year before he
opened up Sezz Medi. Normal profit for a pizza business is $30,000. What is Angelo’s economic
profit?
A) $28,400
B) $350,000
C) $58,400
D) $268,400
4) Suppose Angelo Sessa, owner of Sezz Medi Brick Oven Pizza in NYC, earns $350,000 in
revenue per year. He spends $800 a month on ash wood for his stove, $2000 a month on rent,
and $1500 a month on ingredients. He used to be a lawyer and earned $240,000 a year before he
opened up Sezz Medi. Normal profit for a pizza business is $30,000. If Angelo switches to oak
wood to fire his stove and oak costs an extra $2500 each month, but this change causes his
revenues to increase to $351,000. What is Angelo’s economic profit?
A) -$1,600
B) -$600
C) $9,000
D) $8,000
5) Suppose Angelo Sessa, owner of Sezz Medi Brick Oven Pizza in NYC, earns $350,000 in
revenue per year. He spends $800 a month on ash wood for his stove, $2000 a month on rent,
and $1500 a month on ingredients. He used to be a lawyer and earned $240,000 a year before he
opened up Sezz Medi. Normal profit for a pizza business is $30,000. If Angelo switches to oak
wood to fire his stove and oak costs an extra $2500 each month, but this change causes his
revenues to increase to $351,000. What is Angelo’s opportunity cost of production?
A) $351,000
B) $342,000
C) $351,600
D) $321,600
6) The Roomba 570 is a robotic vacuum cleaner made and sold by iRobot. It can vacuum 4
rooms on a single battery charge and it costs $2 worth of electricity to charge the Roomba. Lynn
is a house cleaner and can vacuum 4 rooms in 1 hour with a traditional vacuum. Suppose you
want the 4 rooms in your house vacuumed once a week for one year. Ignoring the cost of any
electricity Lynn uses, which method is economically efficient if Lynn charges $20 per hour? $30
per hour?
A) Roomba if Lynn charges $20 per hour and Lynn if she charges $30 per hour
B) Lynn if she charges $20 or $30 per hour
C) Roomba if Lynn charges $20 or $30 per hour
D) Lynn if she charges $20 per hour and Roomba if Lynn charges $30 per hour
7) The Roomba 570 is a robotic vacuum cleaner made and sold by iRobot. It can vacuum 4
rooms on a single battery charge and it costs $10 worth of electricity to charge the Roomba.
Lynn is a house cleaner and can vacuum 4 rooms in 1/2 hour with a traditional vacuum. Suppose
you want the 4 rooms in your house vacuumed once a week for one year. Ignoring the cost of
any electricity Lynn uses, which method is economically efficient if Lynn charges $20 per hour?
$30 per hour?
A) Lynn if she charges $20 or $30 per hour
B) Lynn if she charges $20 per hour and Roomba if Lynn charges $30 per hour
C) Roomba if Lynn charges $20 per hour and Lynn if she charges $30 per hour
D) Roomba if Lynn charges $20 or $30 per hour
8) The Roomba 570 is a robotic vacuum cleaner made and sold by iRobot. It can vacuum 4
rooms on a single battery charge and it costs $2 of electricity to charge the Roomba. Lynn is a
house cleaner and can vacuum 4 rooms in 1 hour with a traditional vacuum. Suppose you want
the 4 rooms in your house vacuumed once a week for one year. Ignoring the cost of any
electricity Lynn uses, what is the maximum Lynn could charge per hour for you to choose her
over the Roomba?
A) $10.23 per hour
B) $20.45 per hour
C) $8.27 per hour
D) $16.54 per hour
9) It was more than a century ago that an engineer named Frederick Taylor walked into factories
and starting timing workers with a stop watch. He dissected their movements, and organized
them more efficiently. He turned factory production into a science. Suppose work was completed
in the factory based on what the floor manager decided and workers were paid a flat daily wage.
How does this firm organize production?
A) through the incentive system
B) through the command system
C) through a mixed command and incentive system
D) through the market system
10) It was more than a century ago that an engineer named Frederick Taylor walked into
factories and starting timing workers with a stop watch. He dissected their movements, and
organized them more efficiently. He turned factory production into a science. Suppose workers
were paid a wage based on how much they produced. How does this firm organize production?
A) through the command system
B) through a mixed command and incentive system
C) through the incentive system
D) through the market system
11) It was more than a century ago that an engineer named Frederick Taylor walked into
factories and starting timing workers with a stop watch. He dissected their movements, and
organized them more efficiently. He turned factory production into a science. Suppose work was
completed in the factory based on what the floor manager decided and workers were paid a base
daily wage plus a bonus when they produced more than expected. How does this firm organize
production?
A) through the command system
B) through the incentive system
C) through the market system
D) through a mixed command and incentive system
12) It was more than a century ago that an engineer named Frederick Taylor walked into
factories and starting timing workers with a stop watch. He dissected their movements, and
organized them more efficiently. The monitoring tool, the 21st century equivalent of Taylor’s
stopwatch, is the computer. Those of us who use them produce rivers of data describing the
hours of our work day. Suppose modern firms pay employees based on the quantity of work
completed each day as monitored through computers by managers. How would this solve the
principal-agent problem?
A) through employee incentive pay
B) through employee ownership
C) through employee long-term contracts
D) through employee monitoring
13) Much of the outcry in the 2008 fight over a fat bailout for Wall Street focused on the size of
Wall Street’s fat paychecks. The real problem, according to corporate governance researchers,
isn’t the amount executives receive, it’s how companies pay them. Most companies link
compensation to quarterly performance, encouraging short-term gambles. One way to align pay
with long-term incentives and discourage risky bets would be to stretch compensation over more
years. What is a suggested solution to the principal-agent problem?
A) employee ownership
B) employee incentive pay
C) employee long-term contracts
D) employee monitoring
14) In the personal computer (PC) market in the first half of 2008, Hewlett-Packard maintained
its worldwide No. 1 ranking at a market share of 19.1 percent. Dell’s market share was 16
percent and Acer held onto third place with a 9.5 percent share, and Lenovo maintained fourth
place, with a 7.9 percent share. What type of market structure would the market for PCs
represent?
A) oligopoly
B) perfect competition
C) monopolistic competition
D) monopoly
15) In the personal computer (PC) market in the first half of 2008, Hewlett-Packard maintained
its worldwide No. 1 ranking at a market share of 19.1 percent. Dell’s market share was 16
percent and Acer held onto third place with a 9.5 percent share, and Lenovo maintained fourth
place, with a 7.9 percent share. What is the four-firm concentration ratio in the PC market?
A) 60.3
B) 52.5
C) 45
D) 36.5
16) In the personal computer (PC) market in the first half of 2008, Hewlett-Packard maintained
its worldwide No. 1 ranking at a market share of 19.1 percent. Dell’s market share was 16
percent and Acer held onto third place with a 9.5 percent share, and Lenovo maintained fourth
place, with a 7.9 percent share. What is the Herfindahl-Hirschman Index for the firms
mentioned?
A) 52.5
B) 1643
C) 773
D) 105
17) In the personal computer (PC) market in the first half of 2008, Hewlett-Packard maintained
its worldwide No. 1 ranking at a market share of 19.1 percent. Dell’s market share was 16
percent, Acer held onto third place with a 9.5 percent share, and Lenovo maintained fourth place
with a 7.9 percent share. Predict the range of the Herfindahl-Hirschman Index for the PC market.
A) 0 – 100
B) 100 – 999
C) 10,000
D) 800 – 1,200
18) In September 2008, Toyota Motor’s share of the U.S. auto sales market was 15 percent,
Ford’s market share was 12.1 percent, GM’s was 29.1 percent, Honda’s was 10 percent, Nissan’s
share was 6.2 percent, and Chrysler’s market share was 11.1 percent. What is the four-firm
concentration ratio in the auto market?
A) 83.5
B) 66.2
C) 67.3
D) 62.3
19) In September 2008, Toyota Motor’s share of the U.S. auto sales market was 15 percent,
Ford’s market share was 12.1 percent, GM’s was 29.1 percent, Honda’s was 10 percent, Nissan’s
share was 6.2 percent, and Chrysler’s market share was 11.1 percent. What is the Herfindahl-
Hirschman Index for the firms mentioned?
A) 167
B) 1670
C) 1641
D) 1479
20) In September 2008, Toyota Motor’s share of the U.S. auto sales market was 15 percent,
Ford’s market share was 12.1 percent, GM’s was 29.1 percent, Honda’s was 10 percent, Nissan’s
share was 6.2 percent, and Chrysler’s market share was 11.1 percent. What type of market
structure would the market for autos represent?
A) monopolistic competition
B) monopoly
C) oligopoly
D) markets and competitive environment
21) Constellation Brands Inc. is the world’s biggest wine firm with 300-plus brands, from jug
wines to coveted California reds, including the Clos du Bois, Geyser Peak and Woodbridge by
Robert Mondavi labels. Based on this characteristic of firms, why would Constellation be more
efficient than a market at coordinating economic activity?
A) Constellation has economies of scope.
B) Constellation has lower transaction costs.
C) Constellation has economies of scale.
D) Constellation has economies of team production.
1) What is a firm?
2) Jake opens a pig farm in Idaho. To start his farm, he uses his entire $50,000 of savings from
his savings account. The bank was paying him $2,500 interest on his saving. Explain why the
$2,500 is one of Jake’s costs.
3) What is a normal profit? Is it part of the firm’s opportunity costs, total revenue, or neither?
4) What is the difference between a normal profit and an economic profit?
5) What is economic profit?
6) Can a firm achieve technological efficiency without achieving economic efficiency?