Deck 7: The Production Process: the Behavior of Profit-Maximizing Firms

Question 1

Refer to Scenario 7.1 below to answer the question(s) that follow.
SCENARIO 7.1: You are the owner and only employee of a company that writes computer software that is used by gamblers to collect sports data. Last year you earned a total revenue of $90,000. Your costs for equipment, rent, and supplies were $60,000. To start this business you invested an amount of your own capital that could pay you a return of $40,000 a year.
Refer to Scenario 7.1. During the year your economic costs were

A) $40,000.
B) $60,000.
C) $100,000.
D) $130,000.

Answer 1

$100,000.

Question 2

Refer to the information provided in Figure 7.1 below to answer the following question(s). Figure 7.1
Refer to Figure 7.1. A corn producer's profit is $1,500 and it is producing 500 bushels of output. Then he must have a cost per bushel of

A) $1.
B) $2.
C) $3.
D) $4.

Answer 2

$2.

Question 3

The Oh So Humble Bakery sells 300 muffins at a price of $1 per muffin. Its explicit costs for producing 300 muffins are $250. The Oh So Humble Bakery's economic profits are

A) $35.
B) $50.
C) $250.
D) indeterminate from this information.

Answer 3

indeterminate from this information.

Question 4

If economic profit is zero, a firm

A) earns a negative rate of return.
B) will leave the industry.
C) earns a positive but below normal rate of return.
D) earns exactly a normal rate of return.

Question 5

Refer to the information provided in Figure 7.1 below to answer the following question(s). Figure 7.1
Refer to Figure 7.1. A corn producer's total revenue is $1,000. If she sells each bushel of corn for $5, she must be selling ________ bushels of corn.

A) 200
B) 450
C) 900
D) 4,500

Question 6

Economic costs

A) include both a normal rate of return on investment and the opportunity cost of each factor of production.
B) are equal to the direct costs of hiring all factors of production.
C) are the opportunity cost of each factor of production minus any interest charges paid on borrowed funds.
D) are equal to total revenue minus accounting profit.

Question 7

The Sweet Success Bakery sells 400 cakes at a price of $10 per cake. Its total economic costs for producing 400 cakes are $500. The Sweet Success Bakery's economic profits are

A) $100.
B) $3,500.
C) $4,500.
D) indeterminate from this information.

Question 8

Perfectly competitive firms must make all of the following decisions except

A) how much output to supply.
B) which production technology to use.
C) how much of each input to demand.
D) what price to charge for their output.

Question 9

Refer to the information provided in Figure 7.1 below to answer the following question(s). Figure 7.1
Refer to Figure 7.1. A corn producer's profit is $200 and is producing 100 bushels of corn. Then he must have a cost per bushel of ________.

A) $1
B) $2
C) $3
D) $4

Question 10

The Wax Works sells 400 candles at a price of $10 per candle. The Wax Works' total costs for producing 400 candles are $500. The Wax Works' economic profit is

A) -$100.
B) $3,500.
C) $4,500.
D) indeterminate from this information.

Question 11

Refer to the information provided in Figure 7.1 below to answer the following question(s). Figure 7.1
Refer to Figure 7.1. A corn producer produces 80 bushels of corn and sells each bushel at $5. The cost of producing each unit bushel is $2. This corn producer's total revenue is ________ and profit if ________.

A) $160; $0
B) $240; $80
C) $400; $240
D) $400; $160

Question 12

Refer to Scenario 7.1 below to answer the question(s) that follow.
SCENARIO 7.1: You are the owner and only employee of a company that writes computer software that is used by gamblers to collect sports data. Last year you earned a total revenue of $90,000. Your costs for equipment, rent, and supplies were $60,000. To start this business you invested an amount of your own capital that could pay you a return of $40,000 a year.
Refer to Scenario 7.1. Your accounting profit last year was

A) $10,000.
B) $30,000.
C) $50,000.
D) $60,000.

Question 13

You own a building that has four possible uses: a cafe, a craft store, a hardware store, and a bookstore. The value of the building in each use is $2,000; $3,000; $4,000; and $5,000, respectively. You decide to open a hardware store. The opportunity cost of using this building for a hardware store is

A) $2,000, the value if the building is used as a cafe.
B) $3,000, the value if the building is used as a craft store.
C) $10,000, the sum of the values if the building is used for a cafe, a craft store, or a bookstore.
D) $5,000, the value if you rented the building to someone else to use as a bookstore.

Question 14

Refer to Scenario 7.1 below to answer the question(s) that follow.
SCENARIO 7.1: You are the owner and only employee of a company that writes computer software that is used by gamblers to collect sports data. Last year you earned a total revenue of $90,000. Your costs for equipment, rent, and supplies were $60,000. To start this business you invested an amount of your own capital that could pay you a return of $40,000 a year.
Refer to Scenario 7.1. Your economic profit last year was

A) -$40,000.
B) -$10,000.
C) $10,000.
D) $30,000.

Question 15

Refer to the information provided in Figure 7.1 below to answer the following question(s). Figure 7.1
Refer to Figure 7.1. This corn producer earns a total revenue of $900. Each bushel of corn is sold for $5. This corn producer must be selling ________ bushels of corn.

A) 180
B) 450
C) 900
D) 4,500

Question 16

Refer to Scenario 7.1 below to answer the question(s) that follow.
SCENARIO 7.1: You are the owner and only employee of a company that writes computer software that is used by gamblers to collect sports data. Last year you earned a total revenue of $90,000. Your costs for equipment, rent, and supplies were $60,000. To start this business you invested an amount of your own capital that could pay you a return of $40,000 a year.
Refer to Scenario 7.1. A yearly normal return for your computer software firm would be

A) $20,000.
B) $40,000.
C) $60,000.
D) $100,000.

Question 17

Total revenue minus total cost is equal to

A) the rate of return.
B) marginal revenue.
C) profit.
D) net cost.

Question 18

The Wax Works sells 400 candles at a price of $6 per candle. The Wax Works' total costs for producing 400 candles are $2,500. The Wax Works' economic profit is

A) -$100.
B) $0.
C) $2,400.
D) $2,500.

Question 19

The Oh So Humble Bakery sells 300 muffins at a price of $1 per muffin. Its explicit costs for producing 300 muffins are $250. If the bakery is earning a normal rate of return, then implicit costs must be

A) $50.
B) $100.
C) $250.
D) $350.

Question 20

Refer to the information provided in Figure 7.1 below to answer the following question(s). Figure 7.1
Refer to Figure 7.1. This corn producer produces 100 bushels of corn and sells each bushel at $5. The cost of producing each bushel is $2. This corn producer's total revenue is ________ and profit is ________.

A) $200; $300
B) $300; $200
C) $500; $200
D) $500; $300

Question 21

There are 100 dog kennels in Atlanta. An economist studying the pricing behavior of dog kennels tells you that she is limiting her analysis to a time period that does not allow for any new dog kennels to enter the industry or for any established dog kennels to leave the industry. The time period this economist referred to is the

A) market period.
B) industry run.
C) long run.
D) short run.

Question 22

The rate of return on capital that is just sufficient to keep owners and investors satisfied is called

A) economic profit.
B) a minimum efficient scale.
C) the price-earnings ratio.
D) a normal rate of return.

Question 23

The Cakery Bakery sells 200 muffins at a price of $2 per muffin. Its explicit costs for producing 200 muffins are $350. The Cakery Bakeryʹs economic profits are

A) $35.
B) $50.
C) $400.
D) indeterminate from this information.

Question 24

A firm ________ if it earns zero economic profit.

A) earns a negative rate of return
B) will leave the industry
C) earns a positive but below normal rate of return
D) earns exactly a normal rate of return

Question 25

Refer to Scenario 7.2 below to answer the question(s) that follow.
SCENARIO 7.2: You are the owner and only employee of a company that sets odds for sporting events. Last year you earned a total revenue of $100,000. Your costs for rent and supplies were $50,000. To start this business you invested an amount of your own capital that could pay you a return of $20,000 a year.
Refer to Scenario 7.2. Your economic profit last year was

A) -$40,000.
B) -$10,000.
C) $10,000.
D) $30,000.

Question 26

The Wax Works sells 500 candles at a price of $5 per candle. The Wax Worksʹ total economic costs for producing 500 candles are $3,000. The Wax Worksʹ economic profit is

A) -$3,000.
B) -$500.
C) $2,500.
D) $3,000.

Question 27

Refer to Scenario 7.2 below to answer the question(s) that follow.
SCENARIO 7.2: You are the owner and only employee of a company that sets odds for sporting events. Last year you earned a total revenue of $100,000. Your costs for rent and supplies were $50,000. To start this business you invested an amount of your own capital that could pay you a return of $20,000 a year.
Refer to Scenario 7.2. Your accounting profit last year was

A) $10,000.
B) $30,000.
C) $50,000.
D) $60,000.

Question 28

Refer to Scenario 7.3 below to answer the question(s) that follow.
SCENARIO 7.3: Upon graduating with an accounting degree, you open your own accounting firm of which you are the sole employee. To start the firm you passed on a job offer with a large accounting firm that offered you a salary of $60,000 annually. Last year you earned a total revenue of $100,000. Rent and supplies last year were $50,000.
Refer to Scenario 7.3. Your annual operating profit is

A) -$10,000.
B) $40,000.
C) $50,000.
D) $100,000.

Question 29

Profit is equal to

A) marginal revenue minus marginal cost.
B) total revenue divided by total cost.
C) total revenue minus total cost.
D) total revenue divided by marginal revenue.

Question 30

In the long run

A) a firm can shut down, but it cannot exit the industry.
B) there are no fixed factors of production.
C) a firm can vary all inputs, but it cannot change the mix of inputs it uses.
D) all firms must make economic profits.

Question 31

Refer to Scenario 7.2 below to answer the question(s) that follow.
SCENARIO 7.2: You are the owner and only employee of a company that sets odds for sporting events. Last year you earned a total revenue of $100,000. Your costs for rent and supplies were $50,000. To start this business you invested an amount of your own capital that could pay you a return of $20,000 a year.
Refer to Scenario 7.2. During the year your economic costs were

A) $70,000.
B) $60,000.
C) $50,000.
D) $20,000.

Question 32

The process by which inputs are combined, transformed, and turned into outputs is called

A) production.
B) technology.
C) capitalization.
D) outsourcing.

Question 33

In the short run, a firm

A) has at least one fixed factor of production.
B) can enter an industry where positive profits are being earned.
C) can exit an industry, and all of its factors of production are variable.
D) both B and C are correct.

Question 34

Refer to Scenario 7.3 below to answer the question(s) that follow.
SCENARIO 7.3: Upon graduating with an accounting degree, you open your own accounting firm of which you are the sole employee. To start the firm you passed on a job offer with a large accounting firm that offered you a salary of $60,000 annually. Last year you earned a total revenue of $100,000. Rent and supplies last year were $50,000.
Refer to Scenario 7.3. Your annual economic costs are

A) $0.
B) $50,000.
C) $60,000.
D) $110,000.

Question 35

Refer to Scenario 7.3 below to answer the question(s) that follow.
SCENARIO 7.3: Upon graduating with an accounting degree, you open your own accounting firm of which you are the sole employee. To start the firm you passed on a job offer with a large accounting firm that offered you a salary of $60,000 annually. Last year you earned a total revenue of $100,000. Rent and supplies last year were $50,000.
Refer to Scenario 7.3. Your annual economic profit is

A) -$10,000.
B) $40,000.
C) $50,000.
D) $100,000.

Question 36

You own a building that has four possible uses: a tailor shop, a pharmacy, a sports bar, and an antique mall. The building's value in each use is $4,000; $6,000; $8,000; and $10,000, respectively. You decide to open a sports bar. The opportunity cost of using this building for a sports bar is

A) $4,000, the value if the building is used as a tailor shop.
B) $6,000, the value if the building is used as a pharmacy.
C) $20,000, the sum of the values if the building is used for a tailor shop, a pharmacy, or an antique mall.
D) $10,000, the value if you rented the building to someone else to use as an antique mall.

Question 37

The Cakery Bakery sells 200 muffins at a price of $2 per muffin. Its explicit costs for producing 200 muffins are $350. If the bakery is earning a normal rate of return, then its implicit costs must be

A) $0.
B) $50.
C) $350.
D) $400.

Question 38

The Wax Works sells 500 candles at a price of $10 per candle. The Wax Worksʹ total economic costs for producing 500 candles are $2,000. The Wax Worksʹ economic profit is

A) $2,000.
B) $3,000.
C) $5,000.
D) indeterminate from this information.

Question 39

The Sweet Success Bakery sells 500 cakes at a price of $10 per cake. Its total economic costs for producing 500 cakes are $500. The Sweet Success Bakery's economic profits are

A) $100.
B) $3,500.
C) $4,500.
D) indeterminate from this information.

Question 40

Refer to Scenario 7.2 below to answer the question(s) that follow.
SCENARIO 7.2: You are the owner and only employee of a company that sets odds for sporting events. Last year you earned a total revenue of $100,000. Your costs for rent and supplies were $50,000. To start this business you invested an amount of your own capital that could pay you a return of $20,000 a year.
Refer to Scenario 7.2. A yearly normal return for your company is

A) $20,000.
B) $40,000.
C) $60,000.
D) $100,000.

Question 41

If a firm makes an economic profit, it is making at least a normal rate of return.

Question 42

An economist is studying the pricing behavior of Las Vegas all-you-can-eat buffets. He says he will limit his analysis to a time period that allows for new buffets to enter the market and for existing ones to leave it. The economist is referring to the ________ time period.

A) market
B) industry
C) long-run
D) short-run

Question 43

Refer to Scenario 7.5 below to answer the question(s) that follow.
SCENARIO 7.5: You own and are the only employee of a company that customizes bicycles. Last year your total revenue was $60,000. Your costs for rent and supplies were $25,000. To start this business you invested an amount of your own capital that could pay you a $45,000 a year return.
Refer to Scenario 7.5. Your economic profit last year was

A) -$20,000.
B) -$10,000.
C) $15,000.
D) $35,000.

Question 44

Refer to Scenario 7.6 below to answer the question(s) that follow.
SCENARIO 7.6: Upon graduating with an accounting degree, you open your own accounting firm of which you and your assistant are the only employees. To start the firm you passed on a job offer with a large accounting firm that offered you a salary of $50,000 annually. Last year you earned a total revenue of $120,000. Rent and supplies last year were $50,000. Your assistant's salary is $30,000 annually.
Refer to Scenario 7.6. Your annual economic profit is

A) -$10,000.
B) $20,000.
C) $40,000.
D) $70,000.

Question 45

Refer to Scenario 7.5 below to answer the question(s) that follow.
SCENARIO 7.5: You own and are the only employee of a company that customizes bicycles. Last year your total revenue was $60,000. Your costs for rent and supplies were $25,000. To start this business you invested an amount of your own capital that could pay you a $45,000 a year return.
Refer to Scenario 7.5. A yearly normal return for your company is

A) $25,000.
B) $35,000.
C) $45,000.
D) $70,000.

Question 46

If Harold runs a grocery store and is making a normal rate of return, we can infer that he is also making an economic profit.

Question 47

Firms cannot enter an industry in which positive profits are being earned in

A) the short run.
B) the long run.
C) the short run and in the long run.
D) As long as positive profits are being earned, firms can enter the industry in both the short run and the long run.

Question 48

In the short run, firms can enter an industry but not exit an industry.

Question 49

For economic analysis, the long run is any period in which all inputs are variable (regardless of the length of time involved).

Question 50

Refer to Scenario 7.4 below to answer the question(s) that follow.
SCENARIO 7.4: You own and are the only employee of a company that sells custom embroidered pet sweaters. Last year your total revenue was $120,000. Your costs for equipment, rent, and supplies were $30,000. To start this business you invested an amount of your own capital that could pay you a $50,000 a year return.
Refer to Scenario 7.4. During the year your economic costs were

A) $30,000.
B) $50,000.
C) $80,000.
D) $120,000.

Question 51

Refer to Scenario 7.6 below to answer the question(s) that follow.
SCENARIO 7.6: Upon graduating with an accounting degree, you open your own accounting firm of which you and your assistant are the only employees. To start the firm you passed on a job offer with a large accounting firm that offered you a salary of $50,000 annually. Last year you earned a total revenue of $120,000. Rent and supplies last year were $50,000. Your assistant's salary is $30,000 annually.
Refer to Scenario 7.6. Your annual economic costs are

A) $50,000.
B) $80,000.
C) $100,000.
D) $130,000.

Question 52

Refer to Scenario 7.4 below to answer the question(s) that follow.
SCENARIO 7.4: You own and are the only employee of a company that sells custom embroidered pet sweaters. Last year your total revenue was $120,000. Your costs for equipment, rent, and supplies were $30,000. To start this business you invested an amount of your own capital that could pay you a $50,000 a year return.
Refer to Scenario 7.4. Your economic profit last year was

A) -$20,000.
B) $40,000.
C) $70,000.
D) $90,000.

Question 53

For economic analysis, the short run is considered less than one year.

Question 54

Refer to Scenario 7.5 below to answer the question(s) that follow.
SCENARIO 7.5: You own and are the only employee of a company that customizes bicycles. Last year your total revenue was $60,000. Your costs for rent and supplies were $25,000. To start this business you invested an amount of your own capital that could pay you a $45,000 a year return.
Refer to Scenario 7.5. Your accounting profit last year was

A) -$10,000.
B) $15,000.
C) $35,000.
D) $60,000.

Question 55

A firm has no fixed factors of production in

A) the short run.
B) the long run.
C) the short run and in the long run.
D) neither the short run nor the long run.

Question 56

Refer to Scenario 7.4 below to answer the question(s) that follow.
SCENARIO 7.4: You own and are the only employee of a company that sells custom embroidered pet sweaters. Last year your total revenue was $120,000. Your costs for equipment, rent, and supplies were $30,000. To start this business you invested an amount of your own capital that could pay you a $50,000 a year return.
Refer to Scenario 7.4. A yearly normal return for your company would be

A) $40,000.
B) $50,000.
C) $70,000.
D) $90,000.

Question 57

Refer to Scenario 7.5 below to answer the question(s) that follow.
SCENARIO 7.5: You own and are the only employee of a company that customizes bicycles. Last year your total revenue was $60,000. Your costs for rent and supplies were $25,000. To start this business you invested an amount of your own capital that could pay you a $45,000 a year return.
Refer to Scenario 7.5. During the year your economic costs were

A) $25,000.
B) $35,000.
C) $45,000.
D) $70,000.

Question 58

Deciding to invest in capital is a short-run decision.

Question 59

Refer to Scenario 7.6 below to answer the question(s) that follow.
SCENARIO 7.6: Upon graduating with an accounting degree, you open your own accounting firm of which you and your assistant are the only employees. To start the firm you passed on a job offer with a large accounting firm that offered you a salary of $50,000 annually. Last year you earned a total revenue of $120,000. Rent and supplies last year were $50,000. Your assistant's salary is $30,000 annually.
Refer to Scenario 7.6. Your annual operating profit is

A) -$10,000.
B) $40,000.
C) $70,000.
D) $80,000.

Question 60

Refer to Scenario 7.4 below to answer the question(s) that follow.
SCENARIO 7.4: You own and are the only employee of a company that sells custom embroidered pet sweaters. Last year your total revenue was $120,000. Your costs for equipment, rent, and supplies were $30,000. To start this business you invested an amount of your own capital that could pay you a $50,000 a year return.
Refer to Scenario 7.4. Your accounting profit last year was

A) $20,000.
B) $40,000.
C) $70,000.
D) $90,000.

Question 61

The optimal method of production is the one that

A) maximizes output regardless of cost.
B) maximizes inputs.
C) minimizes cost.
D) minimizes the normal rate of return.

Question 62

Refer to the information provided in Figure 7.2 below to answer the question(s) that follow. Figure 7.2
Refer to Figure 7.2. The average product with two workers is ________ lawns mowed.

A) 4
B) 5
C) 5.5
D) 11

Question 63

Refer to Scenario 7.7 below to answer the question(s) that follow.
SCENARIO 7.7: A lawn service company has the following production possibilities. With one, two, three, and four workers, the company can mow 4, 9, 12, and 14 lawns per day, respectively.
Refer to Scenario 7.7. The marginal product of the second worker is

A) 3.
B) 4.
C) 5.
D) 9.

Question 64

Refer to the information provided in Figure 7.2 below to answer the question(s) that follow. Figure 7.2
Refer to Figure 7.2. The average product of the first worker is ________ lawns moved.

A) 3
B) 4
C) 5
D) 11

Question 65

Refer to Scenario 7.7 below to answer the question(s) that follow.
SCENARIO 7.7: A lawn service company has the following production possibilities. With one, two, three, and four workers, the company can mow 4, 9, 12, and 14 lawns per day, respectively.
Refer to Scenario 7.7. Diminishing returns to labor set in with the ________ worker.

A) first
B) second
C) third
D) fourth

Question 66

One decision that all firms must make is how much output to supply.

Question 67

Refer to the information provided in Figure 7.2 below to answer the question(s) that follow. Figure 7.2
Refer to Figure 7.2. The marginal product of the second worker is ________ lawns mowed.

A) 3
B) 5
C) 8
D) 11

Question 68

Refer to Scenario 7.7 below to answer the question(s) that follow.
SCENARIO 7.7: A lawn service company has the following production possibilities. With one, two, three, and four workers, the company can mow 4, 9, 12, and 14 lawns per day, respectively.
Refer to Scenario 7.7. The average product of labor with three workers is

A) 3.
B) 3.5.
C) 4.
D) 12.

Question 69

Refer to Scenario 7.7 below to answer the question(s) that follow.
SCENARIO 7.7: A lawn service company has the following production possibilities. With one, two, three, and four workers, the company can mow 4, 9, 12, and 14 lawns per day, respectively.
Refer to Scenario 7.7. The marginal product of the third worker is

A) 2.
B) 3.
C) 4.
D) 12.

Question 70

Refer to Scenario 7.7 below to answer the question(s) that follow.
SCENARIO 7.7: A lawn service company has the following production possibilities. With one, two, three, and four workers, the company can mow 4, 9, 12, and 14 lawns per day, respectively.
Refer to Scenario 7.7. The average product of labor with four workers is

A) 3.
B) 3.5.
C) 4.
D) 14.

Question 71

An act of production, as economists use the term, is demonstrated by which of the following?

A) A worker places money in a pension fund.
B) A local nonprofessional theater company performs a play.
C) An individual buys municipal bonds to avoid taxes.
D) A firm buys a pre-existing building in order to expand its operations.

Question 72

Refer to Scenario 7.7 below to answer the question(s) that follow.
SCENARIO 7.7: A lawn service company has the following production possibilities. With one, two, three, and four workers, the company can mow 4, 9, 12, and 14 lawns per day, respectively.
Refer to Scenario 7.7. The marginal product of the fourth worker is

A) 2.
B) 3.
C) 12.
D) 14.

Question 73

To determine the optimal method of production for a good or service, a perfectly competitive firm needs to know all of the following except

A) the market price of output.
B) the technologies of production that are available to the firm.
C) the prices of inputs.
D) the prices charged by its rivals.

Question 74

Economic profit accounts for both implicit and explicit costs.

Question 75

For a firm, its economic profit is usually greater than its accounting profit.

Question 76

Refer to the information provided in Figure 7.3 below to answer the question(s) that follow. Figure 7.3
Refer to Figure 7.3. The marginal product of the second worker is ________ yards raked.

A) 2
B) 13.5
C) 17
D) 27

Question 77

Refer to the information provided in Figure 7.2 below to answer the question(s) that follow. Figure 7.2
Refer to Figure 7.2. The marginal product of the first worker is ________ lawns moved.

A) 3
B) 4
C) 5
D) 11

Question 78

The optimal method of production maximizes cost for a given level of output.

Question 79

Economists consider the long run as a period of more than one year.

Question 80

Firms make decisions with the goal of maximizing total revenue.