Deck 11: The Firm: Production and Costs

Question 1

An economic profit of zero indicates a satisfactory situation for the firm.

Answer 1

True

Question 2

The period of time that is too short for the firm to change the quantity of certain resources used in production,known as fixed inputs,is called the short run.

Answer 2

True

Question 3

The law of diminishing marginal product provides an explanation for why average total cost eventually increases as output is expanded in the short run.

Answer 3

True

Question 4

Ray Tucker has run his company,Tucker's Towing and Wrecking,for two years and has made an accounting profit of $34,000 each year.As long as Tucker's Towing continues to make accounting profits,it is rational to remain in the towing business.

Question 5

Economists define the long run as any production time period lasting over one year.

Question 6

In the long run,all costs are variable.

Question 7

Total cost equals total variable cost plus marginal cost.

Question 8

If a firm experiences economies of scale,the average total cost of production increases as output expands.

Question 9

Economic profit always exceeds accounting profit.

Question 10

Diseconomies of scale are present when the long run average total cost of production declines as output expands.

Question 11

In the short run,all costs are variable.

Question 12

In the short run,some costs are fixed.

Question 13

The total fixed cost of operating a lumberyard equals $12,000 this year.The average fixed cost of the lumberyard will not be affected by the quantity of lumber that is sold.

Question 14

In the long run,firms can vary all inputs in the production process.

Question 15

A Texas oil woman would like to increase the oil produced from her oil fields.Since it takes over a year to drill new wells,she opts instead for increasing labor and other variable inputs to produce more oil from existing wells.She is making a short-run production decision.

Question 16

One would expect to observe a diminishing marginal product of labor when crowded office space reduces the productivity of new workers.

Question 17

When marginal cost is increasing,average total cost must be increasing.

Question 18

If the marginal cost is less than average total cost,average total cost will decrease.

Question 19

When marginal cost exceeds the average variable cost,average variable cost must be increasing.

Question 20

An increase in the price of raw materials will shift both the MC and the ATC curves upward.

Question 21

The long-run average total cost curve is less u-shaped than the short-run average total cost curve.

Question 22

Diseconomies of scale are most likely at very low levels of output.

Question 23

An economist's measurement of profit differs from an accountant's in that:

A) accountants calculate total revenue differently than do economists.
B) economists do not always include all of the opportunity costs when calculating total production costs.
C) accountants do not always include all of the opportunity costs when calculating total production costs.
D) economic profit generally exceeds accounting profit.

Question 24

An understanding of opportunity costs is important to understanding:

A) how to calculate the total revenue generated by a firm.
B) how to assess the economic profitability of a firm.
C) the tax liability of a firm.
D) how accountants calculate accounting profits.

Question 25

If Rocco's Rib Joint took in $35,000 in revenue last week and had out-of-pocket expenses of $31,500:

A) it is clear that Rocco made an economic profit of $3,500.
B) Rocco really didn't make any economic profit since he needs to put the difference between revenue and out-of-pocket expenses back into the firm.
C) it is not clear whether Rocco earned any economic profit last week because it depends on the magnitude of the implicit costs.
D) Rocco clearly did not earn an economic profit.

Question 26

An explicit cost is:

A) an opportunity cost for which payment is not required.
B) an out-of-pocket expense.
C) always larger than an associated implicit cost.
D) both (a) and (b)

Question 27

Scarlett recently began running her husband's lumber mill.Last month she took in $5,000 in sales revenue and paid $3,400 in out-of-pocket costs.Did the lumberyard make an economic profit last month?

A) Definitely not.
B) Yes. After considering non-zero explicit and implicit costs, it is clear that her profit is exactly equal to $1,600.
C) Without knowing the magnitude of implicit costs, it is not possible to state whether the lumberyard earned an economic profit last month.
D) Yes, after factoring implicit costs, it is clear that her profit will exceed $1,600.

Question 28

Which of the following is not an explicit cost for the owner of a local pizza parlor?

A) flour
B) cleaning products
C) other uses for the land that the parlor sits on
D) pizza ovens

Question 29

In the long-run,the firm can only expand output by adding more variable inputs (workers and raw materials).

Question 30

An example of an implicit cost of production is:

A) the cost of leather used in manufacturing furniture.
B) the opportunity cost of space in your home that is used for a home office.
C) the wages paid to high school students that work in a fast-food restaurant.
D) none of the above.

Question 31

Accounting profits are calculated based upon:

A) explicit cash receipts and implicit expenditures of cash.
B) actual cash receipts and actual expenditures of cash.
C) implicit cash receipts and actual expenditures of cash.
D) opportunity costs plus explicit costs.

Question 32

There are two types of costs associated with production: ____ costs that require monetary payments,and ____ costs that do not.

A) implicit; accounting
B) accounting; explicit
C) implicit; explicit
D) explicit; implicit

Question 33

An example of an implicit cost of production is:

A) the cost of raw materials used to produce bread in a bakery.
B) the cost of labor in a factory that assembles DVD players.
C) the income an entrepreneur could have earned working for someone else.
D) all of the above.

Question 34

Economic profits will take into account:

A) explicit costs but not implicit costs.
B) implicit costs but not explicit costs.
C) both implicit and explicit costs.
D) neither explicit nor implicit costs.

Question 35

An implicit cost:

A) is an opportunity cost.
B) is an out-of-pocket expense.
C) does not require an outlay of money.
D) is characterized by both (a) and (c)

Question 36

In the long-run the firm gets to choose which short-run curve it wants to use.

Question 37

Economists normally assume that the goal of a firm is to:

A) sell as many units of output as possible.
B) maximize profits.
C) sell products at the highest prices possible.
D) maximize sales revenue.

Question 38

An economic profit of zero implies:

A) normal profit.
B) the firm is covering both explicit and implicit costs.
C) the firm's revenues are sufficient to compensate the money and time that the owners put into the business.
D) all of the above

Question 39

When a firm makes zero economic profit,it means that:

A) the firm is covering implicit costs alone.
B) the firm is covering the total opportunity costs of its resources.
C) the firm is covering explicit costs alone.
D) the firm is running at a loss.

Question 40

An example of an explicit cost of production is:

A) the cost of foregone labor earnings for an entrepreneur.
B) the cost of flour for a baker.
C) the foregone rent that could have been earned if land owned by a firm was not used as its parking lot.
D) provided by none of the above.

Question 41

The short run is that period in which firms:

A) are free to vary all inputs.
B) are able to vary some, but not all, inputs.
C) can vary inputs, but only by varying all inputs in equal proportion.
D) cannot increase production at all.

Question 42

During the short-run period of the production process,a firm is:

A) unable to vary any of its factors of production.
B) able to vary only some of its factors of production.
C) able to vary all of its factors of production.
D) able to vary the size of its plant.

Question 43

Don Cena promotes boxing matches.He makes $6,500 per fight.Which cost is most relevant to a decision as to whether to promote one more fight?

A) the total cost of promoting all boxing matches during the year
B) the marginal cost of promoting one additional boxing match
C) the average fixed cost of promoting a boxing match
D) the average total cost of promoting a boxing match

Question 44

The short run is not the same length of time for all firms and industries because:

A) entrepreneurs have different tastes and preferences.
B) the average product of labor varies across industries.
C) the life span of capital and the extent of capital specialization will vary across firms and industries.
D) The marginal product of capital begins to diminish at different levels of capital utilization across firms.

Question 45

Exhibit 11-1 Refer to Exhibit 11-1.The total product of labor diminishes with the addition of the ____ picker.

A) fifth
B) seventh
C) eighth
D) ninth

Question 46

The marginal product of capital:

A) is equal to the increase in capital necessary to generate a one-unit increase in output.
B) is equal to the increase in output obtained from a one-unit increase in capital, holding other factors constant.
C) is equal to the incremental profit associated with selling one more unit of output.
D) is equal to the incremental cost of employing one more unit of physical or human capital.

Question 47

A production function:

A) shows the relationship between a firm's costs and revenues.
B) shows the relationship between production and profits.
C) shows the relationship between inputs and the maximum output that can be produced from those inputs.
D) shows the relationship between variable inputs and fixed inputs.

Question 48

An important and often ignored opportunity cost is the:

A) cost of accounting services.
B) cost of missed market opportunities when funds are invested in a firm.
C) cost of interest paid to bondholders by the firm.
D) cost of utilities used by the firm.

Question 49

The production function describes:

A) the relationship between the quantity of inputs utilized and the quantity of output produced.
B) how inputs are most profitably used in production.
C) the most cost-effective method of combining various inputs in the production process.
D) the relationship between a firm's revenue and its level of production.

Question 50

Interest paid on a bank loan by a local ice cream producer is:

A) an implicit cost for the ice cream producer.
B) considered by an accountant when calculating the cost of running the ice cream business.
C) an explicit cost for the ice cream producer.
D) both b. and c.

Question 51

Which of the following observations is true?

A) Sunk costs are irrelevant for any future action.
B) Sunk costs should not be ignored when making decisions.
C) Sunk costs are often hidden.
D) Sunk costs can be recovered using corrective measures.

Question 52

Exhibit 11-1 Refer to Exhibit 11-1.The marginal product of labor begins to diminish with the addition of the ____ picker.

A) fourth
B) fifth
C) seventh
D) eighth

Question 53

Diminishing marginal product of labor occurs when:

A) adding another unit of labor increases output, but not by as large a margin as the last unit of labor employed.
B) the average product of labor begins to rise.
C) adding another unit of labor increases output by a larger margin than the last unit of labor employed.
D) all inputs are varied simultaneously in the same proportion.

Question 54

Which of the following is a reason that marginal product will eventually begin to fall?

A) effective use of fixed inputs
B) decrease in demand
C) increased specialization
D) limited amounts of fixed inputs

Question 55

Kelly,who grows geraniums to sell,is currently producing a level of output at which her marginal cost equals her average variable cost.What must be true about Kelly's average variable cost at this level of output?

A) It is at a minimum.
B) It is at a maximum.
C) It is neither at its maximum nor its minimum.
D) It is greater than the average total cost.

Question 56

The marginal product of labor can be defined as:

A) the change in profit divided by the change in labor, other factors of production held constant.
B) the change in total output divided by a one unit change in labor, other factors of production held constant.
C) the total output divided by the total labor utilized.
D) the change in labor utilized divided by the change in total output, other factors of production held constant.

Question 57

If opportunity costs are ignored:

A) all firms will show accounting profits.
B) all firms will appear to incur economic losses.
C) firms will still make profit-maximizing production decisions.
D) firms experiencing economic losses may appear to be profitable.

Question 58

The long-run production period:

A) is a time when all inputs are variable.
B) varies in length according to how capital goods are specialized.
C) is likely longer for a steel manufacturer than for a retailer who sells watches off a cart at the local mall.
D) is characterized by all of the above.

Question 59

Which of the following factors of production is not variable in the long run?

A) the size of the firm's plant
B) land
C) highly skilled labor
D) All factors are variable in the long run.

Question 60

In the table below,diminishing marginal product is first evident with the addition of the ____ worker.

A) 5
B) 6
C) 7
D) 8

Question 61

Exhibit 11-4 Refer to Exhibit 11-4.What is the marginal product of the fifth worker hired each week?

A) zero bicycles
B) 10 bicycles
C) 15 bicycles
D) -15 bicycles

Question 62

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

A) payment for raw materials used in manufacturing goods
B) interest payments on a loan used to finance the construction of a building
C) shipping charges for the delivery of products
D) wages paid to temporary workers

Question 63

Which of the following are variable costs of production?

A) the wages paid to non-salaried employees
B) the cost of wood used to produce furniture
C) the cost of electricity that powers the lighting and computer systems in an office building
D) All of the above are variable costs of production.

Question 64

Which of the following most accurately describes the long-run period?

A) The long run is a period of time in which a firm is unable to vary some of its factors of production.
B) In the long run, the firm is able to expand output by utilizing additional workers and raw materials, but not physical capital.
C) The long run is of sufficient length to allow a firm to alter its plant capacity and all other factors of production.
D) The long run is of sufficient length to allow a firm to transform economic losses into economic profits.

Question 65

The short run is a time period such that:

A) the existing firms in the industry do not have sufficient time to adjust the quantity of any inputs which they employ.
B) the existing firms in the industry do not have sufficient time to adjust their current rate of output.
C) new entrants have sufficient time to build factories and enter the industry.
D) the existing firms in the market do not have sufficient time to increase the size of their existing plants or build new factories.

Question 66

When marginal product is rising,marginal costs will:

A) rise.
B) remain unchanged.
C) fall.
D) rise by an equal value.

Question 67

Exhibit 11-3 A factory producing CD players finds that its output varies with the number of workers employed each week in the following way:
Refer to Exhibit 11-3.Marginal product begins to diminish with the ____ worker employed.

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

Question 68

Exhibit 11-2 Refer to Exhibit 11-2.How much are total fixed costs (in dollars)?

A) 20
B) 30
C) 40
D) 50

Question 69

Exhibit 11-4 Refer to Exhibit 11-4.What is the marginal product of the second worker hired each week?

A) 10 bicycles
B) 15 bicycles
C) 20 bicycles
D) 30 bicycles

Question 70

As quantity increases,which of the following must be true if average total costs are rising?

A) Marginal cost must be greater than average total cost.
B) Marginal cost must be less than average total cost.
C) Average fixed cost must be increasing.
D) Average fixed cost must be less than average variable cost.

Question 71

Exhibit 11-3 A factory producing CD players finds that its output varies with the number of workers employed each week in the following way:
Refer to Exhibit 11-3.The marginal product of the fifth worker hired is:

A) 112 units of output.
B) 94 units of output.
C) 20 units of output.
D) 18 units of output.

Question 72

If AVC is subtracted from the ATC,the result is:

A) economic profit.
B) accounting profit.
C) average fixed cost.
D) marginal cost.

Question 73

Exhibit 11-4 Refer to Exhibit 11-4.Marginal product begins to diminish:

A) with the first worker hired.
B) with the second worker hired.
C) with the third worker hired.
D) with the fourth worker hired.

Question 74

Total variable costs:

A) are costs associated with short-run fixed capital.
B) are so named because they vary from firm to firm within an industry.
C) increase as production increases.
D) decrease as production increases.

Question 75

Exhibit 11-4 Refer to Exhibit 11-4.If the firm's goal is to maximize weekly output,how many workers should the firm employ each week?

A) one worker
B) two workers
C) three workers
D) four workers

Question 76

Fixed costs are best defined as:

A) costs that do not vary with output.
B) costs that vary with output.
C) the sum of all marginal costs.
D) the change in total cost when one more unit of output is produced.

Question 77

The sum of AVC and AFC equals:

A) total variable cost.
B) economic profit.
C) accounting profit.
D) average total cost.

Question 78

The change in total cost resulting from a one-unit increase in production is called:

A) average fixed cost.
B) average variable cost.
C) marginal cost.
D) marginal revenue.

Question 79

Exhibit 11-2 Refer to Exhibit 11-2.How much are average fixed costs (in dollars)at 4 units of output?

A) 10
B) 20
C) 30
D) 40

Question 80

The marginal cost of a good is:

A) the difference between average total cost and average variable cost.
B) the addition to total cost from producing one more unit of output.
C) decreasing whenever average total cost is decreasing.
D) always equal to average variable cost when the firm is maximizing profit.