Deck 5: Costs and Profit Maximization

Question 1

Refer to Table 5.1. Average total cost (ATC) at 3 units of output is

A) 3,500.
B) 1,400.
C) 1,167.
D) 700.
E) 500.

Answer 1

1,167.

Question 2

After hiring three new employees, a manager sees that total output increases. If the manager hires two additional employees and discovers total output has fallen, the result is due to

A) diseconomies of scale.
B) a poor hiring procedure.
C) diminishing marginal returns.
D) the lack of skills of newest employees-the best workers are hired first.
E) economies of scale.

Answer 2

diminishing marginal returns.

Question 3

Refer to Table 5.1. Marginal cost (MC) of the third unit of output is

A) 3,500.
B) 1,400.
C) 1,167.
D) 700.
E) 500.

Answer 3

700.

Question 4

If the total cost of producing 6 units is $228 and the total cost of producing 7 units is $245, what is the marginal cost of producing the seventh unit?

A) $35
B) $245
C) $3
D) $38
E) $17

Question 5

Labor, land, and capital used in production are

A) resources.
B) outputs.
C) productivity.
D) technological progress.
E) innovations.

Question 6

Marginal total cost is the

A) cost of all resources divided by the quantity of resources.
B) cost of all resources divided by the quantity of output.
C) change in the cost of all resources divided by the quantity of resources.
D) change in the cost of all resources divided by the change in the quantity of resources.
E) change in the cost of all resources divided by the change in the quantity of output.

Question 7

As output rises unit by unit, costs ____ relatively ____ at first, but then ____ more ____.

A) decrease; slowly; increase; rapidly
B) decrease; quickly; increase; slowly
C) rise; slowly; increase; rapidly
D) rise; quickly; increase; slowly
E) rise; quickly; increase; quickly

Question 8

Marginal cost (MC) is equal to average total cost (ATC) at

A) the maximum point of the ATC.
B) the minimum point of the ATC.
C) no point.
D) the minimum point of the MC.
E) the maximum point of the MC.

Question 9

Average total cost is the

A) cost of all resources divided by the quantity of resources.
B) cost of all resources divided by the quantity of output.
C) quantity of output divided by the cost of all resources.
D) change in the cost of all resources divided by the change in the quantity of resources.
E) change in the cost of all resources divided by the change in the quantity of output.

Question 10

Total cost is the cost of

A) land and labor.
B) labor and capital.
C) just land.
D) all resources except physical capital.
E) land, labor, and capital.

Question 11

Economic goods and services produced by business firms are

A) resources.
B) outputs.
C) innovations.
D) productivity.
E) technological progress.

Question 12

Average total cost is

A) the per-unit cost and is derived by dividing total cost by marginal cost.
B) the total unit cost of production.
C) the per-unit cost and is derived by dividing total cost by the quantity of output.
D) just the marginal cost adjusted for the workers' productivity level.
E) derived by dividing marginal cost by the quantity of output.

Question 13

The law stating that added quantities of a variable resource will eventually result in less additional output is called the

A) law of consumer sovereignty.
B) profit maximization rule.
C) law of diminishing marginal returns.
D) law of unintended consequences.
E) antivariable output law.

Question 14

Marginal cost is calculated by dividing

A) the change in total cost by the change in the quantity of output produced.
B) total output by the number of people employed.
C) the change in total output by the change in the number of people employed.
D) the change in total cost by the change in change in variable cost.
E) total cost by total output.

Question 15

Refer to Table 5.1. Marginal cost (MC) is equal to average total cost (ATC)

A) between 1 and 2 units of output.
B) between 6 and 7 units of output.
C) between 7 and 8 units of output.
D) between 9 and 10 units of output.
E) at 3 units of output.

Question 16

Average total cost is calculated by dividing

A) the change in total cost by the change in the quantity of output.
B) total output by the number of people employed.
C) the change in total output by the change in the number of people employed.
D) total cost by total output.
E) total output by total cost.

Question 17

The transformation of resources into economic goods and services is called

A) technical efficiency.
B) resource.
C) production.
D) increasing returns.
E) output.

Question 18

The average total cost curve indicates that

A) as output rises in the short run, costs decline rapidly.
B) as output rises in the short run, per unit costs initially fall but eventually rise.
C) firms generally operate at a highly inefficient point of production.
D) costs cannot be contained even if businesses employ the proper combination of resources.
E) as more output is produced in the short run, average total costs must increase.

Question 19

Which of the following does not refer to diminishing marginal returns?

A) The application of increasing amounts of fertilizer to a field of corn
B) Increasing numbers of seat belts in an automobile
C) Closing part of a restaurant because of a lack of servers
D) Increasing the number of assistant vice presidents as the size of the firm increases
E) Increasing the number of students in one classroom

Question 20

The short run is a

A) 5K run.
B) period of time when plant size cannot be changed.
C) period of time when all resources are variable.
D) period of time when average total costs decline.
E) maximum of 90 days.

Question 21

Refer to Table 5.3. Assuming that costs are equally distributed for the odd output integers, the marginal cost of the sixth unit is

A) $49.
B) $98.
C) $310.
D) $80.
E) $261.

Question 22

The law of diminishing marginal returns states that, when successive equal amounts of a variable resource are combined with a fixed amount of another resource,

A) marginal increases in output that can be attributed to each additional unit of the variable resource will eventually increase.
B) total output always increases.
C) marginal increases in output that can be attributed to each additional unit of the variable resource will eventually decline.
D) total output can never increase.
E) total output can become negative.

Question 23

Refer to Table 5.2. We can conclude that the marginal-cost curve intersects the average-variable-cost curve at ____ units of output and the average-total-cost curve at ____ units of output.

A) 1; 1
B) 2; 3
C) 4; 4
D) 4; 5
E) 6; 7

Question 24

An example of an opportunity cost not measured in the accounting costs of a business firm is

A) payment for the cost of raw materials.
B) wages paid to labor.
C) labor services provided by the firm's owner without reimbursement.
D) electric utility expense.
E) marketing costs that had little payoff.

Question 25

Refer to Table 5.3. If the production of 2 extra units (units 11 and 12) increases total cost by $162, then the

A) marginal cost of the twelfth unit will be $162.
B) total cost of producing 12 units will be $894.
C) average variable cost of producing 11 units is $732.
D) average total cost of producing 12 units is $61.
E) thirteenth unit will have to go up in price.

Question 26

Refer to Table 5.3. If the average variable cost is $52 for an output of 11 units, the

A) total cost of 11 units of output will be $622.
B) total variable cost is $622.
C) marginal cost of the eleventh unit is $52.
D) marginal cost of the eleventh unit is $102.
E) total variable cost is $576.

Question 27

The law of diminishing returns causes the shape of the average-total-cost curve to be

A) hump-shaped.
B) U-shaped.
C) bell-shaped.
D) a circle.
E) a straight line.

Question 28

In Table 5.2, marginal cost is largest for the

A) first unit produced.
B) fourth unit produced.
C) fifth unit produced.
D) sixth unit produced.
E) eighth unit produced.

Question 29

In Table 5.3, when total output is 8 units, the average variable cost is

A) $53.75.
B) $41.25.
C) $15.
D) $3,440.
E) impossible to determine from the information given.

Question 30

Suppose a mechanic uses $150,000 of his own money to start a business. The rate of interest he could earn in a savings account is 1 percent, and the rate of interest he could earn by investing in bonds is 3 percent. What is the opportunity cost of capital when the mechanic uses his money to start his own business?

A) $1,500 per year
B) $3,000 per year
C) $4,500 per year
D) $6,000 per year
E) $150,000

Question 31

In Table 5.2, marginal cost is equal to average total cost at a quantity of

A) 1.
B) 3.
C) 4.
D) 5.
E) 8.

Question 32

Diminishing marginal returns occur because

A) average and marginal relationships behave very differently with respect to each other.
B) the efficiency of variable resources depends on the quantity of the fixed resources.
C) producers are not careful enough in the manufacturing process.
D) workers are lazy and inefficient.
E) workers in some industries lack an adequate formal education.

Question 33

Refer to Table 5.2. Following which unit of output does the law of diminishing marginal returns cause per-unit costs to increase?

A) 1
B) 4
C) 6
D) 7
E) None; the law of diminishing marginal returns does not apply.

Question 34

When diminishing marginal returns occurs, the

A) total variable cost starts to rise.
B) total cost starts to rise.
C) average total cost starts to rise.
D) average variable cost starts to rise.
E) marginal cost starts to rise.

Question 35

If the firm described in Table 5.2 decided to produce nothing, which of the following would be true?

A) Total cost would be zero.
B) Total variable cost would be $30.
C) Total fixed cost would be $40.
D) Average total cost would be zero.
E) Marginal cost would be $10.

Question 36

In Table 5.2, the average fixed cost of the first unit of output is ____, while the average fixed cost of producing 8 units of output is ____.

A) $30; $40
B) $40; $5
C) $40; $40
D) $40; $280
E) $40; $320

Question 37

Which of the following sayings illustrates diminishing returns in the short run?

A) Too many cooks spoil the broth.
B) Jack be nimble, Jack be quick.
C) When the cat is away, the mouse will play.
D) A rolling stone gathers no moss.
E) The grass is always greener on the other side of the fence.

Question 38

Which of the following does not change with the level of output?

A) Total cost
B) Total variable cost
C) Marginal cost
D) Total fixed cost
E) Average cost

Question 39

In Table 5.3, the average fixed cost of the first unit of output is

A) $48.
B) $96.
C) $98.
D) $100.
E) impossible to determine from the information given.

Question 40

Refer to Table 5.2. For what unit of output is the marginal cost double the total fixed cost?

A) 1
B) 4
C) 5
D) 6
E) 8

Question 41

Scenario 5.1
A dentist's practice is organized as a sole proprietorship. Last year the dentist's total revenue was $320,000 and total costs were $250,000. The dentist left a job paying $112,000 a year to start the sole proprietorship.

-According to the information in Scenario 5.1, how much economic profit did the dentist make last year?

A) $320,000
B) $208,000
C) $112,000
D) $70,000
E) -$42,000

Question 42

Economic profit is the difference between a firm's total revenue and its

A) average costs.
B) mandatory costs.
C) opportunity costs not measured in explicit costs.
D) accounting costs.
E) opportunity costs.

Question 43

If a firm's total cost, including opportunity costs, equals total revenue, then economic profit

A) exceeds normal profit.
B) is zero.
C) equals fixed costs.
D) equals variable costs.
E) equals accounting costs.

Question 44

Costs which do not change as output changes are called

A) marginal costs
B) variable costs
C) fixed costs
D) accounting costs
E) short run costs

Question 45

A firm maximizes profit when

A) total revenue equals total cost.
B) marginal revenue equals marginal cost.
C) total revenue is maximized.
D) it produces its output at the lowest cost per unit.
E) it produces the quantity that consumers desire.

Question 46

Figure 5.1

In Figure 5.1, what profit does the firm make on the thirty-fifth good produced and sold?

A) $0
B) $50
C) $70
D) $120
E) $1,750

Question 47

If a firm has total revenue of $100,000, the owner's labor in the firm is valued at $20,000, and the firm has explicit costs of $90,000, then the firm has earned a(n)

A) economic profit of $10,000.
B) accounting profit of $20,000.
C) negative economic profit of $10,000.
D) accounting loss of $10,000.
E) accounting costs of $110,000.

Question 48

The addition to a business firm's total receipts (revenue) that comes from selling one more unit of output is called

A) total costs.
B) normal profit.
C) marginal costs.
D) marginal revenue.
E) total revenue.

Question 49

When Ford Motor Company reports that it earned a loss of $100 million for the fourth quarter of 2007, the firm is

A) reporting economic profit.
B) reporting normal profit.
C) earning a negative economic profit of more than $100 million.
D) earning positive economic profit.
E) earning normal accounting profit.

Question 50

Normal profits refer to

A) fixed costs.
B) variable costs.
C) the accounting profit that would correspond to zero economic profit.
D) positive economic profits.
E) zero accounting profits.

Question 51

Scenario 5.1
A dentist's practice is organized as a sole proprietorship. Last year the dentist's total revenue was $320,000 and total costs were $250,000. The dentist left a job paying $112,000 a year to start the sole proprietorship.

-According to the information in Scenario 5.1, how much accounting profit did the dentist make last year?

A) $320,000
B) $208,000
C) $112,000
D) $70,000
E) -$42,000

Question 52

The existence of economic profits in a competitive market

A) will attract competitors.
B) is usually against the law.
C) allows firms to create monopolies.
D) results in normality.
E) increases negative economic net worth.

Question 53

A firm earns an economic profit when total profit exceeds

A) economic costs.
B) accounting costs.
C) normal accounting profit.
D) normal accounting costs.
E) normal accounting costs less economic costs.

Question 54

If the marginal costs exceed marginal revenue, the firm

A) is maximizing profit.
B) should reduce its level of output to increase profit.
C) would increase profits by increasing production.
D) should shut down.
E) is minimizing its loss.

Question 55

Figure 5.1

In Figure 5.1 the firm is maximizing profit at a quantity of

A) 10.
B) 35.
C) 50.
D) 75.
E) 90.

Question 56

Which of the following is not a variable cost at the sandwich shop?

A) Cost of tomatoes
B) Cost of labor
C) Cost of rent
D) Cost of electricity
E) Cost of bread

Question 57

A firm earns a positive economic profit when total revenue exceeds

A) all costs, including opportunity costs.
B) variable costs.
C) fixed costs.
D) per-unit costs.
E) accounting costs.

Question 58

Figure 5.1

Refer to Figure 5.1. If the current production level is 90 and the firm wishes to maximize profit, it should

A) leave the current production level unchanged.
B) decrease the quantity produced to 75.
C) decrease the quantity produced to 50.
D) decrease the quantity produced to 35.
E) increase production until MR = MC.

Question 59

Accountants refer to zero economic profit as

A) negative actuarial profit.
B) equity income.
C) total profit.
D) normal profit.
E) regular profit.

Question 60

When a firm makes ____ profit, this sends a signal to others. More competitors would enter the business, increasing supply and driving prices ____.

A) zero economic profit; up
B) normal profit; down
C) positive accounting profit; down
D) positive economic profit; up
E) positive economic profit; down

Question 61

A profit-maximizing firm will produce the level of output such that

A) average revenue equals average cost.
B) average revenue equals variable cost.
C) marginal revenue equals rising marginal cost.
D) marginal cost equals rising marginal revenue.
E) marginal revenue exceeds marginal cost by the maximum amount.

Question 62

Figure 5.2

Refer to Figure 5.2. If the firm is incurring losses, we can say with certainty that

A) the firm is producing and selling below quantity Q₁.
B) the firm is producing and selling above quantity Q₃.
C) the firm should increase production.
D) the firm should shut down.
E) no decision should be made about increasing or decreasing the firm's production level unless more information is provided.

Question 63

Assume that marginal revenue equals rising marginal cost at 100 units of output. At this output level, a profit-maximizing firm's total fixed cost is $600 and its total variable cost is $400. If the price of the product is $8 per unit and the firm produces the profit-maximizing level of output, the firm will earn an economic profit of

A) -$200.
B) zero.
C) $100.
D) $200.
E) $800.

Question 64

A firm wishing to maximize profits will produce at the level of output where

A) economic profit is zero.
B) its total cost curve intersects its total revenue curve.
C) costs are at a minimum.
D) total revenue exceeds total cost by the largest amount.
E) marginal revenue exceeds marginal cost by the greatest amount.

Question 65

Assume that a firm is producing an output level such that marginal revenue equals marginal cost. One can correctly conclude that

A) the firm is earning positive economic profit.
B) the firm is earning normal profit.
C) the firm is breaking even.
D) total cost exceeds total revenue by the maximum amount.
E) as long as the firm is covering all of its variable costs, it is producing at the optimal level of output.

Question 66

Assume that marginal revenue equals rising marginal cost at 100 units of output. At this output level, a profit-maximizing firm's total fixed cost is $600 and its total variable cost is $400. If the price of the product is $5 per unit, the firm should produce

A) zero units of output.
B) less than 100 units of output.
C) 100 units of output.
D) more than 100 units of output.
E) The amount is impossible to determine from the information given.

Question 67

Assume that marginal revenue equals rising marginal cost at 100 units of output. At this output level, a profit-maximizing firm's total fixed cost is $600 and its total variable cost is $400. If the price of the product is $10 per unit and the firm produces 100 units, the firm will earn an economic profit of

A) zero.
B) $400.
C) more than zero but less than $100.
D) $100.
E) more than $100.

Question 68

When marginal cost is rising and exceeds marginal revenue, the profit-maximizing firm will

A) produce more.
B) produce less.
C) continue producing the same level of output in the short run.
D) shut down in the long run.
E) exit in the long run.

Question 69

Figure 5.2

Refer to Figure 5.2. If the firm is producing Q₃ units of output, we know that the firm

A) could increase profit by producing and selling less.
B) could increase profit by producing and selling more.
C) is maximizing profit or minimizing losses.
D) is earning a normal profit.
E) has made a loss on each unit produced before Q₃.

Question 70

Figure 5.3

In Figure 5.3, what is the curve marked I?

A) Demand
B) Marginal revenue
C) Average revenue
D) Marginal cost
E) Average total cost

Question 71

Assume that marginal revenue equals rising marginal cost at 100 units of output. At this output level, a profit-maximizing firm's total fixed cost is $600 and its total variable cost is $400. If the price of the product is $3 per unit and the firm produces at the profit-maximizing level, the firm will earn an economic profit equal to

A) $1,000.
B) $700.
C) $400.
D) $600.
E) -$700.

Question 72

When a firm's marginal revenue exceeds its marginal cost, it is producing

A) too much, and should cut back on production to maximize profit/minimize losses.
B) too little, and should increase production to maximize profit/minimize losses.
C) the right amount, as revenue exceeds cost.
D) too much and its machines and employees are overworked.
E) Not enough information is provided to determine what the firm should do.

Question 73

Economic profit is

A) part of total cost.
B) total revenue minus all opportunity costs.
C) total revenue minus accounting costs.
D) the opportunity cost of doing business.
E) total variable cost minus total fixed cost.

Question 74

You have rented an apartment for $1,000 per month, on a 12-month lease, and have just been offered a summer internship in Washington, D.C. with the President's Council of Economic Advisors (congratulations!). Your rent is $1,000 per month. You want to sublet your apartment and put an ad on Craigslist. Only one response is received; someone attending summer school at your university offers you $500 per month. Using marginal analysis, you will

A) wait to get $1,000 per month, because you don't want to lose any money.
B) take $500 because it's better than nothing.
C) wait to get $1,200 per month, because people always pay more at the last minute.
D) decide not to sublet the apartment because it's not allowed in your lease.
E) Consult your economic advisor.

Question 75

The additional cost a firm incurs from selling an extra unit of output is

A) total cost.
B) marginal cost.
C) average cost.
D) fixed cost.
E) variable cost.

Question 76

At a firm's profit-maximizing level of output,

A) marginal revenue exceeds marginal cost.
B) marginal revenue is less than marginal cost.
C) total revenue equals total cost.
D) marginal revenue equals marginal cost.
E) normal profit is zero.

Question 77

Assume that marginal revenue equals rising marginal cost at 100 units of output. At this output level, a profit-maximizing firm's total fixed cost is $600 and its total variable cost is $400. If the price of the product is $8 per unit, the firm should produce

A) zero units of output.
B) less than 100 units of output.
C) 100 units of output.
D) more than 100 units of output.
E) The amount is impossible to determine from the information given.

Question 78

Assume that marginal revenue equals rising marginal cost at 100 units of output. At this output level, a profit-maximizing firm's total fixed cost is $600 and its total variable cost is $400. If the price of the product is $15 per unit, the firm should produce

A) zero units of output.
B) less than 100 units of output.
C) 100 units of output.
D) more than 100 units of output.
E) The amount is impossible to determine from the information given.

Question 79

Assume that marginal revenue equals rising marginal cost at 100 units of output. At this output level, a profit-maximizing firm's total fixed cost is $600 and its total variable cost is $400. If the price of the product is $15 per unit and the firm produces at the profit-maximizing level, the firm will earn an economic profit equal to

A) zero.
B) its normal profit.
C) more than zero but less than $500.
D) $500.
E) more than $500.

Question 80

Figure 5.1

Refer to Figure 5.1. At a quantity of 10, the firm should ____, but at a quantity of 75, the firm should ____.

A) leave production unchanged; also leave production unchanged
B) leave production unchanged; decrease production
C) increase production; decrease production
D) increase production; leave production unchanged
E) decrease production; increase production