Deck 9: Businesses and the Costs of Production

Question 1

Suppose that a business incurred implicit costs of $200,000 and explicit costs of $1 million in a specific year.If the firm sold 4,000 units of its output at $300 per unit, its accounting profits were

A)$100,000 and its economic profits were $0.
B)$200,000 and its economic profits were $0.
C)$100,000 and its economic profits were $100,000.
D)$0 and its economic loss was $200,000.

Answer 1

$200,000 and its economic profits were $0.

Question 2

The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000
Annual revenue from operations = $380,000 Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000
If, other things equal, Creamy Crisp's revenue fell to $286,000,

A)its implicit costs, including a normal profit, would exceed its explicit costs.
B)it would earn a normal profit but not an economic profit.
C)it would suffer an economic loss.
D)its accounting profit would fall to $0.

Answer 2

it would earn a normal profit but not an economic profit.

Question 3

The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000
Annual revenue from operations = $380,000 Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's
Forgone interest on personal funds used to finance the business = $6,000
Creamy Crisp's implicit costs, including a normal profit, are

A)$136,000.
B)$150,000.
C)$94,000.
D)$156,000.

Answer 3

$136,000.

Question 4

The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000
Annual revenue from operations = $380,000 Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's
Forgone interest on personal funds used to finance the business = $6,000
Creamy Crisp's total economic costs are

A)$286,000.
B)$150,000.
C)$94,000.
D)$156,000.

Question 5

Production costs to an economist

A)consist only of explicit costs.
B)reflect opportunity costs.
C)never reflect monetary outlays.
D)always reflect monetary outlays.

Question 6

The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's
Forgone interest on personal funds used to finance the business = $6,000
Creamy Crisp

A)has lower implicit costs, including a normal profit, than its explicit costs.
B)is earning a normal profit but not an economic profit.
C)is earning an economic profit.
D)is suffering an economic loss, when implicit costs are considered.

Question 7

The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's
Forgone interest on personal funds used to finance the business = $6,000
Creamy Crisp's accounting profit is

A)$150,000.
B)$380,000.
C)$230,000.
D)$294,000.

Question 8

Economic cost can best be defined as

A)any contractual obligation that results in a flow of money expenditures from an enterprise to resource suppliers.
B)those payments for resources that involve an obvious cash transaction.
C)the income the firm must provide to resource suppliers to attract resources from alternative uses.
D)the opportunity cost of using a resource already owned by the firm.

Question 9

Which of the following definitions is correct?

A)Accounting profit + economic profit = normal profit.
B)Economic profit − accounting profit = explicit costs.
C)Economic profit = accounting profit − implicit costs.
D)Economic profit − implicit costs = accounting profits.

Question 10

Economic cost can best be defined as

A)any contractual obligation that results in a flow of money expenditures from an enterprise to resource suppliers.
B)any contractual obligation to labor or material suppliers.
C)a payment that must be made to obtain and retain the services of a resource.
D)all costs exclusive of payments to fixed factors of production.

Question 11

Accounting profits are typically

A)greater than economic profits because the former do not take explicit costs into account.
B)equal to economic profits because accounting costs include all opportunity costs.
C)smaller than economic profits because the former do not take implicit costs into account.
D)greater than economic profits because the former do not take implicit costs into account.

Question 12

The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000
Annual revenue from operations = $380,000 Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000
Creamy Crisp's economic profit is

A)$150,000.
B)$80,000.
C)$230,000.
D)$94,000.

Question 13

Implicit and explicit costs are different in that

A)explicit costs are opportunity costs; implicit costs are not.
B)implicit costs are opportunity costs; explicit costs are not.
C)the latter refer to nonexpenditure costs and the former to monetary payments.
D)the former refer to nonexpenditure costs and the latter to monetary payments.

Question 14

An explicit cost is

A)omitted when accounting profits are calculated.
B)a money payment made for resources not owned by the firm itself.
C)an implicit cost to the resource owner who receives that payment.
D)always in excess of a resource's opportunity cost.

Question 15

Which of the following constitutes an implicit cost to the Johnston Manufacturing Company?

A)payments of wages to its office workers
B)rent paid for the use of equipment owned by the Schultz Machinery Company
C)use of savings to pay operating expenses instead of generating interest income
D)economic profits resulting from current production

Question 16

Normal profit is

A)determined by subtracting implicit costs from total revenue.
B)determined by subtracting explicit costs from total revenue.
C)the return to the entrepreneur when economic profits are zero.
D)the average profitability of an industry over the preceding 10 years.

Question 17

Suppose that a business incurred implicit costs of $500,000 and explicit costs of $5 million in a specific year.If the firm sold 100,000 units of its output at $50 per unit, its accounting

A)profits were $100,000 and its economic profits were $0.
B)losses were $500,000 and its economic losses were $0.
C)profits were $500,000 and its economic profits were $1 million.
D)profits were $0 and its economic losses were $500,000.

Question 18

What do wages paid to factory workers, interest paid on a bank loan, forgone interest, and the purchase of component parts have in common?

A)None are either implicit or explicit costs.
B)All are opportunity costs.
C)All are implicit costs.
D)All are explicit costs.

Question 19

The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000
Creamy Crisp's total revenues exceed its total costs, including a normal profit, by

A)$150,000.
B)$94,000.
C)$80,000.
D)$230,000.

Question 20

Economic profits are calculated by subtracting

A)explicit costs from total revenue.
B)implicit costs from total revenue.
C)implicit costs from normal profits.
D)explicit and implicit costs from total revenue.

Question 21

The amount of calendar time associated with the long run

A)is less than that associated with the immediate market period.
B)varies from industry to industry.
C)is the same for all firms.
D)is, by definition, any length of time greater than one year.

Question 22

The basic difference between the short run and the long run is that

A)all costs are fixed in the short run, but all costs are variable in the long run.
B)the law of diminishing returns applies in the long run but not in the short run.
C)at least one resource is fixed in the short run, while all resources are variable in the long run.
D)economies of scale may be present in the short run but not in the long run.

Question 23

Which of the following is not correct?

A)Where marginal product is greater than average product, average product is rising.
B)Where total product is at a maximum, average product is also at a maximum.
C)Where marginal product is zero, total product is at a maximum.
D)Marginal product becomes negative before average product becomes negative.

Question 24

The short run is characterized by

A)plenty of time for firms to either enter or leave the industry.
B)increasing but not diminishing returns.
C)fixed plant capacity.
D)zero fixed costs.

Question 25

The law of diminishing returns results in

A)an eventually rising marginal product curve.
B)a total product curve that eventually increases at a decreasing rate.
C)an eventually falling marginal cost curve.
D)a total product curve that rises indefinitely.

Question 26

The total output of a firm will be at a maximum where

A)MP is at a maximum.
B)AP is at a minimum.
C)MP is zero.
D)AP is at a maximum.

Question 27

The basic characteristic of the short run is that

A)barriers to entry prevent new firms from entering the industry.
B)the firm does not have sufficient time to change the size of its plant.
C)the firm does not have sufficient time to cut its rate of output to zero.
D)a firm does not have sufficient time to change the amounts of any of the resources it employs.

Question 28

The law of diminishing returns describes the

A)relationship between total costs and total revenues.
B)profit-maximizing position of a firm.
C)relationship between resource inputs and product outputs in the short run.
D)relationship between resource inputs and product outputs in the long run.

Question 29

Which of the following is correct?

A)When total product is rising, both average product and marginal product must also be rising.
B)When marginal product is falling, total product must be falling.
C)When marginal product is falling, average product must also be falling.
D)Marginal product rises faster than average product and also falls faster than average product.

Question 30

Which of the following represents a long-run adjustment?

A)A farmer uses an extra dose of fertilizer on his corn crop.
B)Unable to meet foreign competition, a U.S.watch manufacturer sells one of its branch plants.
C)A steel manufacturer cuts back on its purchases of coke and iron ore.
D)A supermarket hires four additional clerks.

Question 31

The long run is characterized by

A)the relevance of the law of diminishing returns.
B)at least one fixed input.
C)insufficient time for firms to enter or leave the industry.
D)the ability of the firm to change its plant size.

Question 32

Marginal product

A)diminishes at all levels of production.
B)may initially increase, then diminish, but never become negative.
C)may initially increase, then diminish, and ultimately become negative.
D)is always less than average product.

Question 33

Fixed cost is

A)the cost of producing one more unit of capital, for example, machinery.
B)any cost that does not change when the firm changes its output.
C)average cost multiplied by the firm's output.
D)usually zero in the short run.

Question 34

If in the short run a firm's total product is increasing, then its

A)marginal product must also be increasing.
B)marginal product must be decreasing.
C)marginal product could be either increasing or decreasing.
D)average product must also be increasing.

Question 35

To economists, the main difference between the short run and the long run is that

A)the law of diminishing returns applies in the long run, but not in the short run.
B)in the long run all resources are variable, while in the short run at least one resource is fixed.
C)fixed costs are more important to decision making in the long run than they are in the short run.
D)in the short run all resources are fixed, while in the long run all resources are variable.

Question 36

If a variable input is added to some fixed input, beyond some point the resulting extra output will decline.This statement describes

A)economies and diseconomies of scale.
B)X-inefficiency.
C)the law of diminishing returns.
D)the law of diminishing marginal utility.

Question 37

Which of the following best expresses the law of diminishing returns?

A)Because large-scale production allows the realization of economies of scale, the real costs of production vary directly with the level of output.
B)Population growth automatically adjusts to that level at which the average product per worker will be at a maximum.
C)As successive amounts of one resource (labor) are added to fixed amounts of other resources (capital), beyond some point the resulting extra or marginal output will decline.
D)Proportionate increases in the inputs of all resources will result in a less-than-proportionate increase in total output.

Question 38

Which of the following is most likely to be a fixed cost?

A)shipping charges
B)property insurance premiums
C)wages for unskilled labor
D)expenditures for raw materials

Question 39

When total product is increasing at a decreasing rate, marginal product is

A)positive and increasing.
B)positive and decreasing.
C)constant.
D)negative.

Question 40

If you owned a small farm, which of the following would most likely be a fixed cost?

A)harvest labor
B)hail insurance
C)fertilizer
D)seed

Question 41

Which of the following is correct as it relates to cost curves?

A)Average variable cost intersects marginal cost at the latter's minimum point.
B)Marginal cost intersects average total cost at the latter's minimum point.
C)Average fixed cost intersects marginal cost at the latter's minimum point.
D)Marginal cost intersects average fixed cost at the latter's minimum point.

Question 42

For most producing firms,

A)marginal cost rises as output is carried to a certain level, and then begins to decline.
B)total costs rise as output is carried to a certain level, and then begin to decline.
C)average total costs decline as output is carried to a certain level, and then begin to rise.
D)average total costs rise as output is carried to a certain level, and then begin to decline.

Question 43

Marginal cost is the

A)rate of change in total fixed cost that results from producing one more unit of output.
B)change in total cost that results from producing one more unit of output.
C)change in average variable cost that results from producing one more unit of output.
D)change in average total cost that results from producing one more unit of output.

Question 44

Other things equal, if the prices of a firm's variable inputs were to fall,

A)one could not predict how unit costs of production would be affected.
B)marginal cost, average variable cost, and average fixed cost would all fall.
C)marginal cost, average variable cost, and average total cost would all fall.
D)average variable cost would fall, but marginal cost would be unchanged.

Question 45

Total fixed cost (TFC)

A)falls as the firm expands output from zero, but eventually rises.
B)falls continuously as total output expands.
C)varies directly with total output.
D)does not change as total output increases or decreases.

Question 46

In the short run, which of the following statements is correct?

A)The marginal cost curve intersects the average variable and average fixed cost curves at their minimum points.
B)Average variable cost declines continuously as total output is expanded.
C)Total cost will exceed variable cost.
D)If the inputs of all resources are increased by equal amounts, total output will expand by diminishing amounts.

Question 47

Other things equal, if the fixed costs of a firm were to increase by $100,000 per year, which of the following would happen?

A)Marginal costs and average variable costs would both rise.
B)Average fixed costs and average variable costs would rise.
C)Average fixed costs and average total costs would rise.
D)Average fixed costs would rise, but marginal costs would fall.

Question 48

If a firm wanted to know how much it would save by producing one less unit of output, it would look to

A)MC.
B)ATC.
C)AVC.
D)AFC.

Question 49

The vertical distance between the total cost and the total variable cost curves differs by an amount that

A)initially increases, but then decreases, as output increases.
B)is constant as output changes.
C)decreases as output increases.
D)increases as output increases.

Question 50

Assume that in the short run a firm is producing 100 units of output, has average total costs of $200, and has average variable costs of $150.The firm's total fixed costs are

A)$5,000.
B)$500.
C)$0.50.
D)$50.

Question 51

In the short run it is impossible for an expansion of output to increase

A)average total cost.
B)average fixed cost.
C)marginal cost.
D)average variable cost.Topic: Short-Run Production Costs

Question 52

Which of the following holds true?

A)There is no relationship between AP and AVC.
B)When MP is rising, AVC is falling, and when MP is falling, AVC is rising.
C)When AP is rising, AVC is falling, and when AP is falling, AVC is rising.
D)When AP is rising, AVC is rising, and when AP is falling, AVC is falling.

Question 53

Which of the following statements is correct?

A)Average total cost is the difference between average variable cost and average fixed cost.
B)Marginal cost measures the cost per unit of output associated with any level of production.
C)When marginal product rises, marginal cost must also rise.
D)Marginal cost is the price or cost of an extra variable input (for example, an additional worker or machine) divided by its marginal product.Topic: Short-Run Production Relationships

Question 54

Fixed costs are associated with

A)highly adjustable inputs such as labor.
B)both the short run and the long run.
C)the short run only.
D)the long run only.

Question 55

Average fixed costs for a given level of output can be determined graphically by

A)summing the marginal costs of any number of units of output and dividing the sum by that output.
B)the vertical distance between TC and TVC.
C)the vertical distance between AVC and MC.
D)the vertical distance between ATC and AVC.

Question 56

Which of the following is correct?

A)There is no relationship between MP and MC.
B)When AP is rising, MC is falling, and when AP is falling, MC is rising.
C)When MP is rising, MC is rising, and when MP is falling, MC is falling.
D)When MP is rising, MC is falling, and when MP is falling, MC is rising.Topic: Short-Run Production Relationships

Question 57

If a technological advance reduces the amount of variable resources needed to produce any level of output, then the

A)AVC curve will shift upward.
B)MC curve will shift downward.
C)ATC curve will shift upward.
D)AFC curve will shift downward.Topic: Short-Run Production Costs Topic: Short-Run Production Relationships Type: Graph

Question 58

In comparing the changes in TVC and TC associated with an additional unit of output, we find that

A)no generalization about the changes in TC and TVC can be made.
B)the changes in TC and TVC are equal.
C)the change in TC is greater than the change in TVC.
D)the change in TVC is greater than the change in TC.

Question 59

Average fixed cost

A)equals marginal cost when average total cost is at its minimum.
B)may be found for any output by adding average variable cost and average total cost.
C)graphs as a U-shaped curve.
D)declines continually as output increases.

Question 60

If you operated a small bakery, which of the following would be a variable cost in the short run?

A)baking ovens
B)interest on business loans
C)annual lease payment for use of the building
D)baking supplies (flour, salt, etc.)

Question 61

If the total variable cost of 9 units of output is $90 and the total variable cost of 10 units of output is $120, then

A)the average variable cost of 10 units is $10.
B)the average variable cost of 9 units is $10.
C)the marginal cost of the tenth unit is $90.
D)the firm is operating in the range of increasing marginal returns.

Question 62

In the long run,

A)all costs are variable costs.
B)all costs are fixed costs.
C)variable costs equal fixed costs.
D)fixed costs are greater than variable costs.

Question 63

The minimum efficient scale of a firm

A)is realized somewhere in the range of diseconomies of scale.
B)occurs where marginal product becomes zero.
C)is in the middle of the range of constant returns to scale.
D)is the smallest level of output at which long-run average total cost is minimized.

Question 64

Because the marginal product of a variable resource at first increases and then decreases as the output of the firm is increased,

A)total cost at first increases at a decreasing rate and then increases at an increasing rate.
B)total variable cost at first increases at an increasing rate and then increases at a decreasing rate.
C)average total cost at first increases and then diminishes.
D)average fixed cost will rise beyond the point of diminishing returns.Topic: Short-Run Production Relationships

Question 65

The short-run average total cost curve is U-shaped because

A)average fixed costs decline continuously as output increases.
B)of increasing and diminishing returns.
C)of economies and diseconomies of scale.
D)minimum efficient scale is encountered.Topic: Short-Run Production Relationships

Question 66

If a firm doubles its output in the long run and its unit costs of production decline, we can conclude that

A)technological progress has occurred.
B)economies of scale are being realized.
C)the firm is encountering diminishing returns.
D)diseconomies of scale are being encountered.

Question 67

If marginal cost is

A)falling, then average total cost must also be falling.
B)rising, then average total cost must also be rising.
C)rising, then average total cost could be either falling or rising.
D)falling, then average total cost could be either falling or rising.

Question 68

In the short run,

A)TVC will increase for a time at a diminishing rate, but then beyond some point will increase at an increasing rate.
B)TVC will increase for a time at an increasing rate, but then beyond some point will increase at a diminishing rate.
C)TVC will increase by the same absolute amount for each additional unit of output produced.
D)one cannot generalize concerning the behavior of TVC as output increases.

Question 69

A natural monopoly exists when

A)unit costs are minimized by having one firm produce an industry's entire output.
B)several formerly competing producers merge to become the only firm in an industry.
C)short-run average total cost curves are tangent to long-run average total cost curves.
D)minimum efficient scale is attained at a small level of output.

Question 70

If an industry's long-run average total cost curve has an extended range of constant returns to scale, this implies that

A)technology precludes both economies and diseconomies of scale.
B)the industry will be a natural monopoly.
C)both relatively small and relatively large firms can be viable in the industry.
D)the industry will comprise a very large number of small firms.

Question 71

Assume a firm closes down in the short run and produces no output.Under these conditions,

A)TVC is positive, but TFC and TC are zero.
B)TFC is positive, but TVC and TC are zero.
C)TFC and TC are positive, but TVC is zero.
D)TFC, TVC, and TC will all be positive.

Question 72

Which of the following is not a source of economies of scale?

A)learning-by-doing
B)labor specialization
C)use of larger machines
D)inelastic resource supply curves

Question 73

When diseconomies of scale occur,

A)the long-run average total cost curve falls.
B)marginal cost intersects average total cost.
C)the long-run average total cost curve rises.
D)average fixed costs will rise.

Question 74

Suppose that, when producing 10 units of output, a firm's AVC is $22, its AFC is $5, and its MC is $30.This firm's

A)ATC is $35.
B)ATC is $57.
C)total cost is $270.
D)total cost is $30.

Question 75

Economies and diseconomies of scale explain

A)the profit-maximizing level of production.
B)why the firm's long-run average total cost curve is U-shaped.
C)why the firm's short-run marginal cost curve cuts the short-run average variable cost curve at its minimum point.
D)the distinction between fixed and variable costs.

Question 76

As output increases, total variable cost

A)increases more rapidly than does total cost.
B)increases continuously at a decreasing rate.
C)increases at a decreasing rate and then at an increasing rate.
D)increases at a constant rate.

Question 77

In the short run, the Sure-Screen T-Shirt Company is producing 500 units of output.Its average variable costs are $2.00 and its average fixed costs are $.50.The firm's total costs

A)are $2.50.
B)are $1,250.
C)are $750.
D)are $1,100.

Question 78

Economies of scale are indicated by

A)the rising segment of the average variable cost curve.
B)the declining segment of the long-run average total cost curve.
C)the difference between total revenue and total cost.
D)a rising marginal cost curve.

Question 79

When a firm does more of something, it gets better at it.This learning-by-doing is

A)a source of diseconomies of scale.
B)a source of economies of scale.
C)called the principle of natural progression.
D)called "spreading the overhead."

Question 80

The vertical distance between a firm's ATC and AVC curves represents

A)AFC, which increases as output increases.
B)AFC, which decreases as output increases.
C)marginal costs, which decrease as output decreases.
D)marginal costs, which increase as output increases.