Introduction to Economic Reasoning, 8e (Rohlf)
Chapter 5: Costs and Decision Making
1) Which of the following is not consistent with economists’ assumptions regarding human
behavior?
A) Individuals are concerned primarily with what is in their best interest.
B) Individuals will consider the expected consequences of their actions as they make choices.
C) Individuals are motivated primarily by a sense of community responsibility and charity.
D) Individuals are unlikely to engage in an act if the personal costs of that act are expected to
exceed the personal benefits.
E) Individuals will engage in an act if the personal benefits derived from that act are expected to
exceed the personal costs.
2) Frequent unannounced quizzes tend to improve class attendance. Which of the following
might explain such behavior?
A) Quizzes increase the marginal benefit derived from missing class.
B) Quizzes increase the marginal cost associated with missing class.
C) Quizzes increase the marginal cost associated with attending class.
D) Students enjoy taking quizzes.
E) None of the above.
3) Imagine two high-school graduates, one with good computer skills and one without. Other
things equal, the opportunity cost of attending college would be
A) higher for the graduate with good computer skills because he or she would be more likely to
benefit from a college education.
B) lower for the graduate with good computer skills because he or she would probably be
sacrificing a better paying job than the graduate with poor skills.
C) the same for both graduates because computer skills have no impact on opportunity cost.
D) lower for the graduate with good computer skills because he or she would be more likely to
benefit from a college education.
E) higher for the graduate with good computer skills because he or she would probably be
sacrificing a better paying job than the graduate with poor skills.
4) Handy Hardware is giving away free tickets to an upcoming baseball game. The tickets are
being awarded on a first-come-first-served basis, and the waiting line is several blocks long.
Who would economists most expect to see in the line?
A) doctors and lawyers
B) elderly people nearing retirement
C) sports fans with full-time jobs
D) the visiting president of a foreign country
E) unemployed sports fans
5) Reliable Motors offers a “free” portable radio to any customer who will test-drive a car and
listen to a sales promotion. Which of the following accurately describes this offer?
A) It is accurate to describe the radio as “free” if customers are not required to make a money
payment to receive it.
B) It is not accurate to describe the radio as “free” because the true cost includes the opportunity
cost of the customers’ time.
C) It will attract customers who value the radio and the test-drive more highly than the time they
must expend to receive them.
D) All of the above are true.
E) Both B and C are true.
6) Which of the following are variable costs of driving your car to the city this weekend?
A) the gasoline consumed on the trip
B) any parking fees you must pay while in the city
C) a fraction of your monthly auto insurance premium
D) the cost of renewing the annual safety inspection which expired last weekend
E) Both A and C
7) Which of the following is a fixed cost of producing video monitors?
A) The cost of the electronic components used in each monitor.
B) The cost of electricity to run the firm’s assembly line.
C) The wages paid to the people who operate the firm’s assembly line.
D) The interest on the debt incurred to purchase the firm’s plant and equipment
E) All of the above are fixed costs.
8) Grandpa used to say “two can live as cheaply as one.” This old saying is accurate in describing
A) variable costs such as food.
B) fixed costs such as rent.
C) both fixed and variable costs.
D) neither fixed nor variable costs.
E) some variable costs, but no fixed costs.
9) The difference between explicit and implicit costs is that
A) implicit costs involve a monetary payment while explicit costs do not.
B) implicit costs are obvious while explicit costs are not.
C) explicit costs involve a monetary payment while implicit costs do not.
D) implicit costs are imaginary while explicit costs are not.
E) explicit costs are imaginary while implicit costs are not.
10) Implicit costs
A) are obvious costs; costs which are easily recognized.
B) are the cost of using your own resources.
C) generally involve a monetary payment to others.
D) are not true costs and should be ignored.
E) include the cost of purchasing raw materials from suppliers.
11) Fixed costs
A) increase as output increases.
B) decline as output increases.
C) can be avoided by reducing output to zero.
D) do not vary with output.
E) graph as a “U” shaped curve.
12) Which of the following is most likely to be a fixed cost?
A) the cost of raw materials
B) monthly rental payments on equipment
C) the wages of shipping clerks
D) the cost of electricity to run production machinery
E) the cost of delivering the finished product
13) Variable costs
A) cannot be avoided by producing zero output.
B) tend to increase as output is expanded, but do not decrease as output is reduced.
C) tend to decrease as output is reduced, but do not increase as output is expanded.
D) can be avoided by producing nothing.
E) would graph as a horizontal straight line.
14) Which of the following is most likely to be a variable cost?
A) the salaries of security guards
B) the monthly payment for fire insurance
C) the wages of production workers
D) rental payments on office equipment
E) the monthly rent on the warehouse
15) Average fixed cost
A) does not vary with output.
B) declines as output increases.
C) graphs as a “U” shaped curve.
D) increases with output.
E) graphs as a vertical straight line.
16) Average variable cost
A) is calculated by dividing total cost by the number of units of output.
B) graphs as a horizontal straight line.
C) is equal to average fixed cost plus average total cost.
D) declines over all ranges of output.
E) is equal to average total cost minus average fixed cost.
17) Marginal cost
A) is the cost of producing one additional unit of output.
B) is equal to the change in total fixed cost from one level of output to the next.
C) is equal to total cost minus total fixed cost.
D) declines over all ranges of output.
E) is equal to the change in average total cost from one level of output to the next.
18) Which of the following is true?
A) The average variable cost curve intersects the marginal cost curve at the latter’s minimum.
B) The marginal cost curve intersects the average total cost curve at the latter’s minimum.
C) The marginal cost curve intersects the average fixed cost curve at the latter’s minimum.
D) The average fixed cost curve graphs as a horizontal straight line.
E) The average fixed cost curve intersects the average variable and average total cost curves at
their minimums.
19) Which of the following is true?
A) Average total cost achieves its minimum at a lower level of output than average variable cost.
B) Average variable cost achieves its minimum at a lower level of output than marginal cost.
C) Average fixed cost achieves its minimum at a lower level of output than either average
variable cost or average total cost.
D) Average variable cost achieves its minimum at a lower level of output than average total cost.
E) The average total cost curve declines forever; it is not a “U” shaped curve.
Use the information provided below to answer the following question(s).
20) Based on the table above, the marginal cost of the 5th unit of output
A) is $50.
B) is $36.
C) is $30.
D) is $20.
E) cannot be determined from the information provided.
21) Based on the table above, total fixed cost
A) is equal to $20.
B) is equal to $30.
C) is equal to $50.
D) is equal to $220.
E) cannot be determined from the information provided.
22) Based on the table above, the average total cost of producing four units of output
A) is $37.50.
B) is $150.
C) is $25.
D) is $200.
E) cannot be determined from the information provided.
23) Based on the table above, the average variable cost of producing three units of output
A) is $20.
B) is $25.
C) is $37.50.
D) is $41.66.
E) cannot be determined from the information provided.
24) If it costs a business $5,000 to produce 998 units of output, $50,100 to produce 999 units,
and $50,220 to produce 1,000 units,
A) the marginal cost of the 1,000th unit of output is $220.
B) the average total cost of producing 1,000 units of output is $50.40.
C) the marginal cost of the 999th unit of output is $100.
D) the total fixed cost is $4,000.
E) the marginal cost of the 1,000th unit of output is $50,220.
25) The Jones Helmet Company manufactures 1,000 bicycle helmets a day, and is able to sell
each helmet for $10.00. If the marginal cost of producing the 1,000th helmet was $11.25, this
firm should
A) produce fewer helmets because marginal cost exceeds marginal revenue.
B) produce more helmets because revenue would rise by $10.00 for each additional helmet
produced.
C) continue to produce 1,000 helmets per day.
D) produce more helmets because profit would increase by $1.25 for each additional helmet
produced.
E) The correct answer cannot be determined from the information provided.
26) Clayton Fashions produces custom dresses. The firm is presently producing 5 dresses a week
at a total cost of $4,000. The firm’s owner believes that raising production to six dresses per
week would raise total cost to $4,800, and expanding production to 7 dresses would raise total
cost to $6,000 per week. If the firm can sell its dresses for $1,000 each, it should
A) continue to produce 5 dresses because that is the profit-maximizing quantity.
B) expand production to 7 dresses.
C) expand production to 6 dresses, but not to 7.
D) leave the industry because it is incurring a loss.
E) produce fewer than 5 dresses.
27) Honest John’s law firm currently charges a flat fee of $500 per lawsuit and litigates 40 cases
per month. John, the firm’s president, believes that reducing the flat fee to $450 per case would
increase the firm’s caseload to 50 per month. The firm could handle these additional cases if it
hired one more lawyer at a monthly salary of $3,000. Should the firm make these changes?
A) Yes, the change would increase the firm’s revenues by $4,500, which is more than the $3,000
cost of hiring the new attorney.
B) No, the change would only increase the firm’s revenues by $2,500, which is less than the
$3,000 cost of hiring the additional attorney.
C) It doesn’t matter, the firm’s profits will be unaffected by this change.
D) Yes, the changes would increase the firm’s revenues by $7,500, which is more than the
$3,000 cost of hiring the additional attorney.
E) The question cannot be answered from the information provided.
28) A firm will maximize its profit (or minimize it’s loss) if it produces the level of output at
which
A) marginal revenue exceeds marginal cost by the greatest amount.
B) marginal cost exceeds marginal revenue by the greatest amount.
C) total costs are minimized.
D) marginal revenue is equal to marginal cost.
E) marginal cost is minimized.
29) Which of the following costs of producing computer memory chips SHOULD NOT be
considered when deciding whether to increase production?
A) the wages paid to the workers on the memory chip assembly line
B) the costs of the materials that go into the production of each chip
C) the cost of packaging and shipping completed memory chips to the firm’s customers.
D) the wages paid to engineers working in research and development
E) All of the above costs should be considered when making this decision.
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30) Steve’s Pizzeria currently bakes 100 pizzas per week which it sells at a price of $15 per
pizza. Steve believes he could sell 120 pizzas each week if he lowered price to $14 per pizza. If
it costs $10 to prepare each additional pizza, should Steve lower price and increase production?
A) Yes. He will sell each pizza for $14, a price that greatly exceeds their $10 cost.
B) No. It will cost him an additional $200 to make the 20 additional pizzas but they generate
only $180 of additional revenue.
C) Yes. It will cost him only an additional $200 to make the 20 additional pizzas but they
generate $280 of additional revenue.
D) No. Firms should never consider lowering the price of their products.
E) Yes. Firms should always try to sell as much of their product as possible.
Use the following information to answer the following question(s).
Data for PDQ Aviation
31) Based on the table above, what are PDQ Aviation’s fixed costs?
A) $1,100 per day
B) $100 per day
C) $1,000 per day
D) $1,150 per day
E) Fixed costs cannot be determined from the information given.
32) Based on the table above, what is the marginal cost of the 5th daily flight?
A) $200
B) $520
C) $250
D) $150
E) $320
33) Based on the table above, suppose PDQ is currently operating 4 flights a day and is
considering increasing the number of daily flights to 5. Regardless of the number of flights
offered each day, each flight carries 5 passengers who pay $70 each for tickets. Should the firm
offer the additional flight?
A) Yes. The 5th daily flight would generate $350 in additional revenue but add only $200 to
costs.
B) Yes. The 5th daily flight would generate $200 in additional revenue but add $350 to costs.
C) No. The 5th daily flight would generate $350 in additional revenue but add $1600 to costs.
D) No. The 5th daily flight would generate $200 in additional revenue but add $350 to cost.
E) No. The firm should shut down and limit its loss to its fixed costs.
34) Based on the table above, if the firm did offer the 5th daily flight, what would happen to the
firm’s profit?
A) Profits would rise by $200 per day.
B) Profits would remain unchanged.
C) Profits would rise by $350 per day.
D) Profits would rise by $150 per day.
E) Profits would fall by $200 per day.
35) Based on the table above, if we continue to assume that each flight carries 5 passengers who
each pay $70 each, what is the profit-maximizing number of daily flights for PDQ Aviation?
A) 5 flights per day
B) 6 flights per day
C) 8 flights per day
D) 9 flights per day
E) 10 flights per day
36) Based on the table above, suppose the price of a ticket on PDQ’s flights falls to $30, but each
flight continues to carry 5 passengers. How many flights should PDQ offer and why?
A) The firm should not offer any flights in order to limit its losses to its fixed costs.
B) The firm should offer 2 flights each day because this is where marginal cost is minimized, at
$50.
C) The firm should offer 4 flights each day. This will minimize the firm’s losses at $800 per day.
D) The firm should offer 10 flights a day in order to maximize its revenue.
E) The best course of action cannot be determined from the information provided.
1) Economists assume that individuals
A) are motivated primarily by concern for others.
B) act impulsively.
C) pursue their own self-interest.
D) use their intuition to make wise decisions.
Question Status: Previous Edition
2) Economic models may not accurately predict the behavior of individuals if those individuals
A) fail to consider the interests of others.
B) act selfishly.
C) behave in an impulsive manner.
D) always consider the opportunity costs of their decisions.
3) Bob walked into the clothing store and, without a moment’s hesitation, bought the first shirt he
saw that was his size. His behavior
A) is clearly consistent with the assumption of rationality.
B) might be rational if he has very little time to shop.
C) is clearly impulsive and is therefore inconsistent with the assumption of rationality.
D) should be described as impulsive even if he had previously considered the alternative shirts in
the store and their prices.
4) Which of the following behaviors is inconsistent with the way economists assume individuals
will act?
A) Susie selected her car by reading, test-driving several models, and comparing their features
and prices.
B) Alex wanted to go to the concert but considered the likely impact on his calculus grade and
decided to study instead.
C) Fran really wanted the red dress but thought it was too expensive; so she bought the green one
instead.
D) The salesman offered to let John use the store phone, but because John didn’t want to interfere
with business calls, he used the pay phone.
5) If we use the cost-benefit model, which of the following high school students is most likely to
attend college?
A) a student with an aptitude for auto mechanics
B) a student with a decent job and opportunities for advancement
C) a student who values present income much more highly than future income
D) a student who qualifies for several scholarships
6) Suppose that a firm’s fixed cost is $100, the marginal cost of the first unit of output is $20, the
marginal cost of the second unit is $10, and the marginal cost of the third unit is $30. Then we
can say that the total cost of producing three units of output is
A) $190.
B) $53.33.
C) $160.
D) $63.33.
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Question Status: Previous Edition
7) One summer, John spent every night after work building a garage. “I did all the labor myself,
so it didn’t cost me anything. And I managed to save $3,000 compared to the price Ace Builders
quoted me.” Which of the following is true?
A) John’s calculation ignores the explicit cost of his labor.
B) John must have decided that his leisure time was worth more than $3,000.
C) John must be irrational to give up that many evenings to save only $3,000.
D) John’s calculation ignores the implicit cost of his labor.
8) Promise Pharmaceutical Company has invested $10 million trying to develop a cure for a rare
disease. So far their efforts have been unsuccessful. Economists would describe this $10 million
expenditure as a
A) sunk cost.
B) fixed cost.
C) variable cost.
D) marginal cost.
Answer the following question(s) on the basis of the following information.
9) Based on the table above, the firm’s fixed cost is
A) $5.
B) $42.
C) $23.
D) $10.
10) Based on the table above, the marginal cost of the third unit would be
A) $30.
B) $7.
C) $10.
D) $5.
11) Based on the table above, if the firm produced 3 units, average total cost would be
A) $10.
B) $30.
C) $7.
D) None of the above.
12) Profits are maximized (or losses minimized) at the output level where
A) marginal revenue exceeds marginal cost by the largest amount.
B) fixed costs are minimized.
C) marginal revenue is equal to marginal cost.
D) marginal cost is at a minimum.
13) If the marginal cost of producing an additional unit of output is $50 and the marginal revenue
from selling that unit is $60,
A) the unit should not be produced since it will make the business worse off.
B) the unit should be produced since it will make the business $60 better off.
C) the unit should not be produced since the business is already maximizing its profit.
D) the unit should be produced since it will make the business $10 better off.
Use the following information in answering the following question(s).
Data for John’s Cabinet Company
14) Based on the table above, John’s Cabinet Company will maximize its profit (or minimize its
loss) by producing
A) 2 cabinets a week.
B) 5 cabinets a week.
C) 7 cabinets a week.
D) 10 cabinets a week.
15) Based on the table above, if John’s Cabinet Company could sell each cabinet for $525 instead
of $440, the profit-maximizing level of output would be
A) 2 cabinets a week.
B) 5 cabinets a week.
C) 7 cabinets a week.
D) 10 cabinets a week.
16) Based on table above, John’s Cabinet Company
A) is earning a profit.
B) is incurring a loss.
C) might be earning a profit or incurring a loss; we can’t tell from the information provided.