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Class:
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Chapter 07: Production and Cost in the Firm
True / False
1. Implicit costs involve direct cash payments for the use of a resource.
a.
True
b.
False
False
2. All other things constant, higher implicit costs result in lower accounting profit.
a.
True
b.
False
False
3. If all the savings of an owner are invested in his consulting company, an increase in the interest rate increases his
implicit costs.
a.
True
b.
False
True
4. If a firm’s accounting profit is positive, its economic profit must also be positive.
a.
True
b.
False
False
5. In the long run, all of a firm’s inputs are variable.
a.
True
b.
False
True
6. In the short run, all costs are fixed.
a.
True
b.
False
False
7. If marginal product is negative, total product must be negative.
a.
True
b.
False
False
8. If a firm is experiencing diminishing marginal returns, its marginal product is negative.
a.
True
b.
False
False
9. If a firm is experiencing diminishing marginal returns, its marginal product is declining.
a.
True
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Chapter 07: Production and Cost in the Firm
b.
False
True
10. When marginal product is negative, the slope of the total product curve must be negative.
a.
True
b.
False
True
11. If the marginal product of an input is negative, the total product must also be negative.
a.
True
b.
False
False
12. When marginal cost is decreasing, total cost is rising.
a.
True
b.
False
True
13. The short-run average fixed cost curve is a horizontal line.
a.
True
b.
False
False
14. The marginal cost curve intersects the minimum point of the average variable cost curve.
a.
True
b.
False
True
15. Long-run average costs are the same as long-run total costs.
a.
True
b.
False
False
16. The long-run average cost curve is tangent to the minimum point of every short-run average total cost curve.
a.
True
b.
False
False
17. If a firm is producing at its minimum efficient scale, increasing its output slightly will always lead to diseconomies of
scale.
a.
True
b.
False
False
18. If a firm experiencing “economies of scale” decreases its output, its long-run average cost will decrease.
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Chapter 07: Production and Cost in the Firm
a.
True
b.
False
False
19. If a firm is experiencing diseconomies of scale, its long-run total cost curve is upward sloping.
a.
True
b.
False
True
20. Marginal cost indicates how much total cost increases if one more unit is produced or how much total cost drops if
production declines by one unit.
a.
True
b.
False
True
Multiple Choice
21. The reason economists assume that firms try to maximize economic profit is that:
a.
firms that don’t earn profits will, over time, have difficulty securing financing to survive.
b.
firms in the real world always maximize profit.
c.
profit is easier to calculate than revenue.
d.
if a firm fails to earn a profit in its first year, it will go out of business.
e.
profit maximization is easier for firms than revenue maximization.
a
22. Which of the following is not an explicit cost?
a.
Salaries
b.
Sales taxes
c.
The cost of utilities, such as gas and electricity
d.
Insurance premiums
e.
The value of a firm owner’s time
e
23. Suppose Ripco owns the building from which it operates. If:
a.
the firm pays no rent, there is no opportunity cost.
b.
the firm does not rent the building to anyone else, there is no opportunity cost.
c.
the firm pays rent, there is an opportunity cost.
d.
its usage of the building precludes it from renting to anyone else, there is an opportunity cost.
e.
the firm can use the building for other things, there is no opportunity cost.
24. Which of the following are implicit costs for a typical firm?
a.
Insurance costs
b.
Electricity costs
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Chapter 07: Production and Cost in the Firm
c.
The opportunity costs of the capital owned and used by the firm
d.
The cost of the labor hired by the firm
e.
The cost of raw materials
25. Cash payments for steel to be used in the production process would be an example of _____.
a.
sunk costs
b.
fixed costs
c.
explicit costs
d.
implicit costs
e.
entrepreneurial costs
26. A firm’s opportunity costs of using resources provided by the firm’s owners are called _____.
a.
sunk costs
b.
fixed costs
c.
explicit costs
d.
implicit costs
e.
entrepreneurial costs
27. Unlike implicit costs, explicit costs:
a.
reflect opportunity costs.
b.
include the value of the owner’s time.
c.
are not included in a firm’s accounting statements.
d.
are actual cash payments.
e.
do not change as a firm’s output changes.
28. An implicit cost is:
a.
any cost a firm cannot avoid in the short run.
b.
any expenditure a firm makes.
c.
an opportunity cost.
d.
accurately measured in accounting statements.
e.
ignored by economists.
29. The opportunity cost of a resource:
a.
includes both explicit and implicit cost.
b.
includes explicit cost only.
c.
includes implicit cost only.
d.
is equal to the market price of the resource.
e.
is not related to the market price of the resource.
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Chapter 07: Production and Cost in the Firm
a
30. Explicit costs are:
a.
not part of opportunity costs.
b.
the only costs considered in opportunity costs.
c.
exactly the same as implicit costs.
d.
actual monetary payments for resources purchased.
e.
the opportunity costs of using resources owned by the firm.
31. John moved his office from a building he was renting downtown to the carriage house he owns behind his house.
Which of the following statements shows how his costs change?
a.
Both his explicit and implicit costs will rise.
b.
His explicit costs will rise, while his implicit costs will fall.
c.
Both his explicit and implicit costs will fall.
d.
His explicit costs fall, while his implicit costs will rise.
e.
His explicit costs will rise, while his implicit costs will remain the same.
32. A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job, which pays
$20,000 a year, and take over a building that he owns and currently rents to his brother for $6,000 a year. His expenses at
the sushi bar would be $50,000 for food and $2,000 for gas and electricity. The chef’s explicit costs are equal to_____.
a.
$26,000
b.
$66,000
c.
$78,000
d.
$52,000
e.
$72,000
33. A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job, which pays
$20,000 a year, and take over a storage building that he owns and currently rents to his brother for $6,000 a year. His
expenses at the sushi bar would be $50,000 for food and $2,000 for gas and electricity. The chef’s implicit costs are equal
to _____.
a.
$26,000
b.
$66,000
c.
$78,000
d.
$52,000
e.
$72,000
a
34. Two friends, Diane and Sam, own and run a bar. Diane tends bar on Monday, Wednesday, and Friday and receives a
wage in addition to tips. Sam tends bar on Tuesday, Thursday, and Saturday and receives only tips. Which of the
following represents an implicit cost of operating the bar?
a.
Diane’s wages
b.
Sam’s time
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Chapter 07: Production and Cost in the Firm
c.
Diane’s tips
d.
Sam’s tips
e.
Both Diane’s and Sam’s tips
35. Maryann and Don want to open their own deli. To do so, Maryann must give up her job, where she earns $20,000 per
year, and Don must give up his part-time job, where he earns $10,000 per year. They must liquidate their money market
fund, which earns $1,000 interest annually. The rent on the building is $10,000 per year, and the expenses of such
necessities as utilities, corned beef, and pickles are $35,000 annually. _____ is the explicit cost per year of operating the
deli.
a.
$10,000
b.
$35,000
c.
$45,000
d.
$31,000
e.
$76,000
c
36. Amanda, age 6, opens a lemonade stand. She makes all the lemonade from a mix she found in her parents’ pantry. Her
stand is an old box she found in the garage. The pitcher and paper cups were taken from the kitchen. Which of the
following is true?
a.
The opportunity cost of the lemonade is zero.
b.
The only opportunity cost of the lemonade is Amanda’s time.
c.
Amanda’s explicit costs are zero.
d.
The implicit costs of Amanda’s lemonade are zero.
e.
Whatever revenue Amanda gets will be pure economic profit.
c
37. Which of the following would not appear on a firm’s accounting statement?
a.
Sunk costs
b.
Fixed costs
c.
Explicit costs
d.
Implicit costs
e.
Insurance costs
38. Accounting profit equals:
a.
explicit costs minus implicit costs.
b.
economic profit minus implicit costs.
c.
economic profit minus explicit costs.
d.
economic profit minus explicit costs and implicit costs.
e.
economic profit plus implicit costs.
e
39. The difference between a firm’s total revenue and what must be paid to attract resources from their best alternative use
is called _____.
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Chapter 07: Production and Cost in the Firm
a.
total revenue
b.
utility
c.
economic profit
d.
cost
e.
production efficiency
c
40. Opportunity cost usually:
a.
cannot be measured.
b.
applies to labor but not to capital.
c.
is involved in calculating economic profit.
d.
is greater than the cash payment made to a resource.
e.
is less than the cash payment made to a resource.
c
41. Economic profit is defined as _____.
a.
total fixed cost plus total variable cost
b.
total revenue minus marginal costs
c.
average revenue minus average variable cost
d.
total revenue minus total costs
e.
marginal revenue minus opportunity costs
42. Economic profit is defined as _____.
a.
total revenue minus implicit costs
b.
total revenue plus explicit costs
c.
total revenue plus implicit costs
d.
wages plus interest minus rent
e.
total revenue minus implicit and explicit costs
e
43. Which of the following would be shown on a firm’s accounting statement?
a.
Revenue, implicit costs, explicit costs, and economic profit
b.
Revenue, implicit costs, explicit costs, and accounting profit
c.
Revenue, explicit costs, and economic profit
d.
Revenue, explicit costs, and accounting profit
e.
Revenue, implicit costs, and accounting profit
44. Maryann and Don want to open their own deli. To do so, Maryann must give up her job, where she earns $20,000 per
year, and Don must give up his part-time job, where he earns $10,000 per year. They must liquidate their money market
fund, which earns $1,000 interest annually. The rent on the building is $10,000 per year, and the expenses of such
necessities as utilities, corned beef, and pickles are $35,000 annually. The minimum amount of revenue per year that
would make it worthwhile, financially, for Maryann and Don to run the deli is _____.
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Chapter 07: Production and Cost in the Firm
a.
$10,000
b.
$35,000
c.
$45,000
d.
$31,000
e.
$76,000
e
45. Suppose Ernie gives up his job as financial advisor for P.E.T.S., where he earned $30,000 per year, to open up a store
selling pet-care products. He invested $10,000 in the store, which were originally savings that earned 5 percent interest.
This year, the revenue from the new business was $50,000 and the explicit costs were $10,000. The accounting profit
earned by Ernie was _____.
a.
$10,000
b.
$50,000
c.
$20,000
d.
$40,000
e.
$9,500
46. Suppose Ernie gives up his job as financial advisor for P.E.T.S., where he earned $30,000 per year, to open up a store
selling pet-care products. He invested $10,000 in the store, which were originally savings that earned 5 percent interest.
This year, the revenue from the new business was $50,000 and the explicit costs were $10,000. The economic profit
earned by Ernie was _____.
a.
$10,000
b.
$50,000
c.
$20,000
d.
$40,000
e.
$9,500
e
47. A firm’s accounting profit is equal to _____.
a.
total revenue minus opportunity costs
b.
total revenue plus opportunity costs
c.
total revenue minus imputed costs
d.
total revenue minus explicit costs
e.
total revenue minus explicit and implicit costs
48. Economic profit is defined as:
a.
total revenue minus price.
b.
price minus quantity.
c.
total revenue minus what must be paid to resources to attract them from their best alternative use.
d.
total revenue divided by what must be paid to resources to attract them from their best alternative use.
e.
total revenue plus what must be paid to resources to attract them from their best alternative use.
c
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Chapter 07: Production and Cost in the Firm
49. A firm’s economic profit is equal to _____.
a.
total revenue minus accounting profit
b.
total revenue minus explicit costs
c.
total revenue plus accounting profit
d.
total revenue plus opportunity costs
e.
accounting profit minus implicit costs
e
50. Accounting profit is:
a.
always less than economic profit.
b.
never less than economic profit.
c.
equal to economic profit if a normal profit is earned.
d.
less than economic profit only when implicit costs are greater than explicit costs.
e.
greater than economic profit only when implicit costs are greater than explicit costs.
51. Suppose Ben buys out Jerry’s ownership in a firm but retains him as a salaried employee. Jerry gets a salary equal to
the value of the share that he held in the firm. In this case, which of the following statements is true?
a.
The firm’s economic profit increases.
b.
The firm’s economic profit decreases.
c.
There is no change in the economic profit of the firm.
d.
There is no change in the accounting profit of the firm.
e.
The firm’s accounting profit increases.
c
52. Normal profit is defined as:
a.
accounting profit.
b.
economic profit.
c.
the profit necessary to ensure that opportunity costs are covered.
d.
accounting profit minus economic profit.
e.
economic profit minus accounting profit.
c
53. Suppose a soccer coach has been making $25,000 per year but gives up his coaching job in order to make soccer
shoes. If his revenue from the sale of these shoes is $50,000 and his materials cost $20,000, then his economic profit is
equal to _____.
a.
$5,000
b.
$25,000
c.
$30,000
d.
$50,000
e.
$80,000
a
54. Suppose Bob leaves his $50,000-a-year job as a financial advisor to P.E.T.S. and starts his own business selling pet-
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Chapter 07: Production and Cost in the Firm
care products. In the first year, his accounting profit is $70,000. Based on this level of success, Bob should:
a.
return to his old job because his economic profit is negative.
b.
return to his old job because his economic profit is smaller than his accounting profit.
c.
return to his old job because his economic profit is less than his old salary.
d.
stay with his new firm because his economic profit is positive.
e.
stay with his new firm because accounting profit is positive.
55. Suppose a lawyer leaves his $50,000-a-year job and starts his own firm breeding pit bulls. In the first year, his
accounting profit is $70,000. The lawyer finances his new business with $100,000 from his savings account, which had
earned 10 percent interest. From his new business, the lawyer earns an economic profit of _____.
a.
$10,000
b.
$60,000
c.
$70,000
d.
−$80,000
e.
−$90,000
a
56. If a pizza joint earns only a normal profit this year, its:
a.
economic profit is equal to its accounting profit.
b.
economic profit is zero.
c.
economic profit is equal to the average accounting profit in other industries.
d.
accounting profit is zero.
e.
accounting profit is less than its economic profit.
57. If a shoe store earns more than a normal profit, its:
a.
economic profit must be greater than its accounting profit.
b.
economic profit is positive.
c.
economic profit is, therefore, equal to its accounting profit.
d.
accounting profit is zero.
e.
accounting profit is less than its economic profit.
58. Suppose a professor gives up her teaching job to devote her time to writing textbooks. Soon after, salaries for
professors rise. As a result, _____.
a.
her accounting profit will rise
b.
her accounting profit will fall
c.
her explicit costs will rise
d.
her economic profit from textbooks will fall
e.
her economic profit from textbooks will rise
59. Suppose Joan uses her savings to purchase computer equipment for her new consulting business. Soon after this, the
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Chapter 07: Production and Cost in the Firm
market interest rate rises. As a result, her:
a.
explicit costs rise immediately.
b.
accounting profit falls immediately.
c.
accounting profit rises immediately.
d.
economic profit rises immediately.
e.
economic profit falls immediately.
e
60. John moved his office from a building he was renting downtown to the carriage house he owns behind his house. How
will his profit change?
a.
Implicit costs will fall.
b.
Explicit costs will remain unchanged, while implicit costs will rise.
c.
Economic profit will fall.
d.
Explicit costs will rise.
e.
Accounting profit will rise.
e
61. Table 7.1 shows revenue and cost information for Sally’s small business. Sally owns a small business that she operates
in a building she owns. Given the information in the table below, Sally‘s accounting profit is equal to _____.
Table 7.1
Total Revenue
$100,000
Assistant’s salary
$20,000
Material & equipment
$15,000
Forgone salary
$30,000
Forgone interest
$1,000
Foregone building rental
$10,000
a.
$80,000
b.
$50,000
c.
$65,000
d.
$35,000
e.
$24,000
c
62. Table 7.1 shows revenue and cost information for Sally’s small business. Sally owns a small business that she operates
in a building she owns. Given the information in the table below, Sally‘s economic profit is equal to _____.
Table 7.1
Total Revenue
$100,000
Assistant’s salary
$20,000
Material & equipment
15,000
Forgone salary
30,000
Forgone interest
1,000
Foregone building rental
10,000
a.
$80,000
b.
$50,000
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Chapter 07: Production and Cost in the Firm
c.
$65,000
d.
$35,000
e.
$24,000
63. A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job, which pays
$20,000 a year, and take over a storage building he owns and currently rents for $6,000 a year. His expenses at the sushi
bar would be $50,000 for food and $2,000 for gas and electricity. _____ is the minimum revenue he must earn per year in
order for it to be worth his while to open his sushi bar.
a.
$26,000
b.
$66,000
c.
$78,000
d.
$52,000
e.
$72,000
c
64. Inputs that can be increased or decreased in the short run are called _____.
a.
fixed inputs
b.
variable inputs
c.
economic inputs
d.
accounting inputs
e.
normal inputs
65. The short run is a period of time:
a.
equal to or less than six months.
b.
during which all resources may be varied.
c.
during which all resources are fixed.
d.
during which at least one resource is fixed.
e.
during which at least one resource may be varied.
66. Which of the following is most likely to be a fixed resource for a word processing firm?
a.
A laptop
b.
A worker
c.
The building
d.
A month’s electricity bill
e.
A bundle of paper
c
67. Which of the following probably has the shortest long run?
a.
A law firm
b.
A steel mill
c.
An automobile plant
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Chapter 07: Production and Cost in the Firm
d.
A tire factory
e.
An aircraft engine factory
68. Which of the following would most likely reach the long run most rapidly?
a.
A nuclear power plant
b.
A college
c.
A lumber mill
d.
A shopping mall
e.
A hot dog stand
69. The length of time that represents the long run:
a.
is greater than one year.
b.
is greater than six months.
c.
is longer in service industries than in manufacturing.
d.
is the same for all industries.
e.
varies from industry to industry.
70. The short run is a period of time:
a.
less than one year.
b.
greater than one year.
c.
during which all resources are variable.
d.
during which at least one resource is fixed.
e.
during which at least one resource is variable.
71. The additional output obtained by adding another unit of labor to the production process is called _____.
a.
the marginal cost of labor
b.
the average output of labor
c.
a variable cost
d.
the marginal product of labor
e.
the marginal utility of labor
72. Marginal product is defined as:
a.
the increase in revenue that occurs when an additional unit of a resource is added.
b.
the increase in output that occurs when all resources are increased by the same proportion.
c.
the increase in output that occurs when an additional unit of a resource is added, holding all other resources
constant.
d.
the amount of additional resources needed to increase output by one unit when all resources are increased by
the same amount.
e.
the amount of additional money needed to increase output by one unit when all resources are held constant.
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Chapter 07: Production and Cost in the Firm
73. Table 7.2 shows labor and the quantity of shoes produced by a firm. Given the information in the table below, _____
is the marginal product of the third unit of labor.
Table 7.2
Labor
Total product
(pairs of shoes)
0
0
1
20
2
50
3
75
4
80
5
75
a.
45 pairs of shoes
b.
25 pairs of shoes
c.
15 pairs of shoes
d.
75 pairs of shoes
e.
50 pairs of shoes
74. Table 7.2 shows labor and the quantity of shoes produced by a firm. Given the information in the table below, _____
is the average product of the third unit of labor.
Table 7.2
Labor
Total product
(pairs of shoes)
0
0
1
20
2
50
3
75
4
80
5
75
a.
45 pairs of shoes
b.
25 pairs of shoes
c.
15 pairs of shoes
d.
10 pairs of shoes
e.
75 pairs of shoes
75. Table 7.2 shows labor and the quantity of shoes produced by a firm. Given the information in the table below, _____
is the marginal product of the fourth unit of labor.
Table 7.2
Labor
Total product
(pairs of shoes)
0
0
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Chapter 07: Production and Cost in the Firm
1
20
2
50
3
75
4
80
5
75
a.
5 pairs of shoes
b.
10 pairs of shoes
c.
20 pairs of shoes
d.
50 pairs of shoes
e.
80 pairs of shoes
76. Table 7.2 shows labor and the quantity of shoes produced by a firm. Given the information in the table below, _____
is the average product of the fourth unit of labor?
Table 7.2
Labor
Total product
(pairs of shoes)
0
0
1
20
2
50
3
75
4
80
5
75
a.
5 pairs of shoes
b.
10 pairs of shoes
c.
20 pairs of shoes
d.
50 pairs of shoes
e.
80 pairs of shoes
77. Table 7.2 shows labor and the quantity of shoes produced by a firm. Given the information in the table below, at
which point do diminishing marginal returns set in?
Table 7.2
Labor
Total product
(pairs of shoes)
0
0
1
20
2
50
3
75
4
80
5
75
a.
Before the first unit of labor
b.
Between the first and second units of labor
c.
Between the second and third units of labor
d.
Between the third and fourth units of labor
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Chapter 07: Production and Cost in the Firm
e.
Between the fourth and fifth units of labor
78. Table 7.2 shows labor and the quantity of shoes produced by a firm. Given the information in the table below, at
which of the following points do negative marginal returns set in?
Table 7.2
Labor
Total product
(pairs of shoes)
0
0
1
20
2
50
3
75
4
80
5
75
a.
Before the first unit of labor
b.
Between the first and second units of labor
c.
Between the second and third units of labor
d.
Between the third and fourth units of labor
e.
Between the fourth and fifth units of labor
79. Increasing marginal returns are generally the result of _____.
a.
diseconomies of scale
b.
increasing costs
c.
the specialization and division of labor
d.
labor unions
e.
change in technology
80. If a firm is experiencing diminishing marginal returns to labor, then which of the following statements is true?
a.
The first workers the firm hired were better than the workers hired later on.
b.
The firm is experiencing decreasing returns to scale.
c.
The positive effect of specialization in production is being offset by the negative effect of crowding of inputs.
d.
Output is decreasing with increasing inputs.
e.
The firm should buy more non–labor inputs.
81. Table 7.3 shows the number of workers and total output produced in a firm. In the table below, the total product of
four workers is _____.
Table 7.3
Number
of workers
Total
output
0
0
1
10
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Chapter 07: Production and Cost in the Firm
2
40
3
100
4
140
5
160
6
170
7
150
a.
0
b.
10
c.
20
d.
140/4
e.
140
e
82. Table 7.3 shows the number of workers and total output produced in a firm. In the table below, the marginal product
of the third worker is _____.
Table 7.3
Number
of workers
Total
output
0
0
1
10
2
40
3
100
4
140
5
160
6
170
7
150
a.
20
b.
100/3
c.
60
d.
50
e.
140
c
83. Table 7.3 shows the number of workers and total output produced in a firm. In the table below, diminishing marginal
returns set in with the addition of the _____.
Table 7.3
Number
of workers
Total
output
0
0
1
10
2
40
3
100
4
140
5
160
6
170
7
150
Name:
Class:
Date:
Chapter 07: Production and Cost in the Firm
a.
first worker
b.
third worker
c.
fourth worker
d.
fifth worker
e.
seventh worker
c
84. The law of diminishing marginal returns states that:
a.
long-run average cost declines as output increases.
b.
if the marginal product is above the average product, the average will rise.
c.
as units of a variable input are added to a given amount of fixed inputs, the marginal product of the variable
input eventually diminishes.
d.
as a person consumes more of a good, the marginal satisfaction from that good eventually diminishes.
e.
if marginal product is positive, total product rises.
c
85. Table 7.4 shows labor, total product, and marginal product for a firm. In the table below, marginal returns increase
with the hiring of up to _____ workers.
Table 7.4
Units of
Labor
Total
Product
Marginal
product
0
0
–
1
6
6
2
14
8
3
24
10
4
36
12
5
42
6
6
46
4
a.
six
b.
two
c.
five
d.
four
e.
three
86. Table 7.4 shows labor, total product, and marginal product for a firm. In the table below, marginal returns begin to
diminish with the hiring of the _____ worker.
Table 7.4
Units of
Labor
Total
product
Marginal
product
0
0
–
1
6
6
2
14
8
3
24
10