Deck 6: Businesses and Their Costs

Question 1

Shares of ownership in corporations are referred to as:

A) limited liability.
B) collateral.
C) stocks.
D) bonds.

Answer 1

C

Question 2

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) compensations that must be received by resource owners to ensure their continued supply.
D) all costs exclusive of payments to fixed factors of production.

Answer 2

C

Question 3

The issue of the separation of ownership and control is concerned with the fact that:

A) politicians pass laws to control corporations,but since corporations cannot vote,they cannot protest such control.
B) major decisions in large corporations are generally made by professional managers rather than the owners of the corporation.
C) most farms are owned by landlords who do not live on the farms.
D) many small proprietorships are actually controlled by large corporations.

Answer 3

B

Question 4

A person receives a paper asset from a corporation that is a promise from the corporation to repay a loan at a fixed rate of interest.This type of asset is referred to as a:

A) bank loan.
B) share.
C) stock.
D) bond.

Question 5

A business organization that owns and operates one or more plants is:

A) a firm.
B) an industry.
C) a partnership.
D) an S corporation.

Question 6

One major advantage of limited liability is that it:

A) is not subject to a free-rider problem.
B) is not subject to a principal-agent problem.
C) has unlimited profit sharing among the firm's owners.
D) shields the personal assets of owners from liability claims.

Question 7

Which of the following is correct?

A) A person who purchases a corporate bond is borrowing money from a corporation.
B) A person who purchases a corporate stock is buying ownership in the corporation.
C) A person who purchases a corporate bond is guaranteed to earn dividends from the stock.
D) A person who purchases a corporate stock gets the option to buy other shares at lower prices.

Question 8

One principal advantage of the corporations is that owners:

A) are not taxed for income received.
B) always control the company.
C) are sole proprietors.
D) have limited liability.

Question 9

A group of firms that produce the same or similar products is:

A) a plant.
B) an industry.
C) a partnership.
D) a multiplant firm.

Question 10

If a company owns plants at various stages of the production process,this is called:

A) an industry.
B) a conglomerate.
C) a vertically integrated firm.
D) a multiplant firm.

Question 11

A conglomerate is a(n):

A) firm with monopoly power.
B) industry in which there is only one firm.
C) firm that owns plants in different markets and industries.
D) firm that owns plants at various stages of the production process.

Question 12

The legal concept of limited liability is important in which of the following types of business organizations?

A) Monopolies
B) Corporations
C) Partnerships
D) Sole proprietorships

Question 13

The major source of production in the economy comes from:

A) conglomerates.
B) corporations.
C) partnerships.
D) sole proprietorships.

Question 14

The most effective form of business organization for raising money to finance the expansion of its facilities and capabilities is a:

A) partnership.
B) corporation.
C) conglomerate.
D) sole proprietorship.

Question 15

In a corporation,the interests of the owners,who seek to maximize profits,may differ from the interests of the managers,who seek prestige and high income.This divergence would be considered:

A) a free-rider problem.
B) a rationing problem.
C) a limited liability problem.
D) a principal-agent problem.

Question 16

Suppose you own $50,000 of personal property,$5,000 of stock in General Statics Corporation,a $10,000 savings account,and $20,000 of government bonds.If General Statics goes bankrupt,the most you could lose is:

A) $50,000.
B) $5,000.
C) $35,000.
D) $85,000.

Question 17

The principal-agent problem in corporations arises from:

A) the fact that the principal objective of most corporations is to make profits and not to contribute to charity.
B) a conflict of interest between corporate executives who manage the firm and stockholders who own the firm.
C) the view that workers are agents who are not considered to be the principal asset of the corporations for which they work.
D) a perspective that corporations are agents that represent the principal source of power for government and the national economy.

Question 18

A group of three plants that is owned and operated by a single firm and that consists of a farm growing wheat,a flour-milling plant,and a plant that bakes and sells bread would best be an example of a:

A) multiplant firm.
B) vertically integrated firm.
C) partnership.
D) conglomerate.

Question 19

A Macy's or JCPenney store is an example of:

A) a conglomerate.
B) a vertically integrated firm.
C) a multiplant firm.
D) an industry.

Question 20

A factory,mine,store,or warehouse that performs one or more functions in making and distributing goods and services is:

A) a firm.
B) a plant.
C) an industry.
D) a corporation.

Question 21

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 22

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 23

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 24

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) Depreciation charges on company-owned equipment
D) Economic profits resulting from current production

Question 25

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 26

Which of the following is most likely to be an implicit cost for Company X?

A) Depreciation charges on company-owned equipment
B) Rental payments on IBM equipment
C) Payments for raw materials purchased from Company Y
D) Transportation costs paid to a nearby trucking firm

Question 27

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 28

Implicit costs are:

A) regarded as costs by accountants but not by economists.
B) payments that a firm makes to other firms or individuals who supply resources to it.
C) nonexpenditure costs.
D) costs that vary proportionately with output.

Question 29

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 30

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 31

Implicit and explicit costs are different in that:

A) explicit costs are relevant only in the short run.
B) implicit costs are relevant only in the short run.
C) the latter refer to nonexpenditure costs and the former to out-of-pocket costs.
D) the former refer to nonexpenditure costs and the latter to out-of-pocket costs.

Question 32

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 zero.
B) losses were $500,000 and its economic losses were zero.
C) profits were $500,000 and its economic profits were $1 million.
D) profits were zero and its economic losses were $500,000.
Total revenue was 100,000 * $50 = $5,000,000 and explicit costs were also $5,000,000.So the firm lost its implicit costs for an economic loss of $500,000.

Question 33

Suppose that you could prepare your own tax return in 15 hours,or you could hire a tax specialist to prepare it for you in 2 hours.You value your time at $11.00 an hour.The tax specialist will charge you $55 an hour.The opportunity cost of preparing your own tax return is:

A) $40.
B) $55.
C) $110.
D) $165.
The use of your time to do the tax returns is 15*$11.00 = $165.00.This is your opportunity cost.

Question 34

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 zero.
B) $200,000 and its economic profits were zero.
C) $100,000 and its economic profits were $100,000.
D) zero and its economic loss was $200,000.
Total revenue is 4,000 * $300 = $1,200,000 and explicit costs were $1,000,000.Accounting profits were $200,000,but implicit costs of $200,000 mean economic profit was zero.

Question 35

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 36

Which of the following is a short-run adjustment?

A) A local bakery hires two additional bakers.
B) Six new firms enter the plastics industry.
C) The number of farms in the United States declines by 5 percent.
D) BMW constructs a new assembly plant in South Carolina.

Question 37

From an economist's point of view,costs:

A) consist only of explicit costs.
B) may or may not involve monetary outlays.
C) never reflect monetary outlays.
D) always reflect monetary outlays.

Question 38

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 one year by definition.

Question 39

To the economist,total cost includes:

A) explicit and implicit costs,including a normal profit.
B) neither implicit nor explicit costs.
C) implicit,but not explicit,costs.
D) explicit,but not implicit,costs.

Question 40

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 41

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 42

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) positive relationship between resource inputs and product outputs in the long run.

Question 43

Refer to the above data.Average product is at a maximum when:

A) five workers are hired.
B) four workers are hired.
C) three workers are hired.
D) two workers are hired.
Average product at two workers is 90/2 = 45.This is the highest average product of all worker levels.

Question 44

Marginal product is:

A) the increase in total output attributable to the employment of one more worker.
B) the increase in total revenue attributable to the employment of one more worker.
C) the increase in total cost attributable to the employment of one more worker.
D) total product divided by the number of workers employed.

Question 45

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 46

The law of diminishing returns indicates that:

A) as extra units of a variable resource are added to a fixed resource,marginal product will decline beyond some point.
B) because of economies and diseconomies of scale,a competitive firm's long-run average total cost curve will be U-shaped.
C) the demand for goods produced by purely competitive industries is downsloping.
D) beyond some point,the extra utility derived from additional units of a product will yield the consumer smaller and smaller extra amounts of satisfaction.

Question 47

Refer to the above data.The marginal product of the fourth worker:

A) is 5.
B) is 7.
C) is 7¹/₂.
D) cannot be calculated from the information given.
The fourth worker increased total product from 25 to 30,so her marginal product is 5.

Question 48

Refer to the above data.Diminishing marginal returns become evident with the addition of the:

A) sixth worker.
B) fourth worker.
C) third worker.
D) second worker.
The second worker added 50 (90 - 40)units to output,whereas the third worker added 36 (126 - 90)units.Thus,marginal returns diminished with the third worker.

Question 49

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 output will decline.
D) Proportionate increases in the inputs of all resources will result in a less-than-proportionate increase in total output.

Question 50

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) at least one fixed resource.
D) zero fixed costs.

Question 51

The first,second,and third workers employed by a firm add 24,18,and 9 units to total product respectively.Therefore,the:

A) marginal product of the third worker is 9.
B) total product of the three workers is 54.
C) average product of the three workers is 18.
D) marginal product of the first worker is 18.

Question 52

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 53

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 54

Refer to the above data.When two workers are employed:

A) total product is 20.
B) total product is 18.
C) average product is 10.
D) total product cannot be determined from the information given.
The second worker's marginal product is 10 and the total product before he was added equaled 8,so total product is 18.

Question 55

In the above diagram curves 1,2,and 3 represent the:

A) average,marginal,and total product curves respectively.
B) marginal,average,and total product curves respectively.
C) total,average,and marginal product curves respectively.
D) total,marginal,and average product curves respectively.

Question 56

Refer to the above data.The marginal product of the sixth worker is:

A) 180 units of output.
B) 30 units of output.
C) 15 units of output.
D) negative.
The sixth worker added 15 (180 - 165)units to output.This is her marginal product.

Question 57

The above diagram suggests that:

A) when marginal product is zero,total product is at a minimum.
B) when marginal product lies above average product,average product is rising.
C) when marginal product lies below average product,average product is rising.
D) when total product is at a maximum,so are marginal product and average product.

Question 58

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 59

Which of the following statements concerning the relationships between total product (TP),average product (AP),and marginal product (MP)is not correct?

A) AP continues to rise so long as TP is rising.
B) AP reaches a maximum before TP reaches a maximum.
C) TP reaches a maximum when the MP of the variable input becomes zero.
D) MP cuts AP at the maximum AP.

Question 60

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 61

Refer to the above diagram.At output level Q total cost is:

A) 0BEQ.
B) BCDE.
C) 0BEQ plus BCDE.
D) 0AFQ plus BCDE.

Question 62

Refer to the above diagram.At output level Q total fixed cost is:

A) 0BEQ.
B) BCDE.
C) 0BEQ - 0AFQ.
D) 0CDQ.

Question 63

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 64

Refer to the above diagram.At output level Q average fixed cost:

A) is equal to EF.
B) is equal to QE.
C) is measured by both QF and ED.
D) cannot be determined from the information given.

Question 65

Fixed cost is:

A) the cost of producing one more unit of capital,say,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 66

Refer to the above diagram.The vertical distance between ATC and AVC reflects:

A) the law of diminishing returns.
B) the average fixed cost at each level of output.
C) marginal cost at each level of output.
D) the presence of economies of scale.

Question 67

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 68

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

A) Fuel and power payments
B) Interest on business loans
C) Rental payments on IBM equipment
D) Real estate taxes

Question 69

When total product is increasing at an increasing rate,marginal product is:

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

Question 70

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 71

In the above diagram,total product will be at a maximum at:

A) Q₃ units of labor.
B) Q₂ units of labor.
C) Q₁ units of labor.
D) some point that cannot be determined with the above information.

Question 72

Refer to the above diagram.At output level Q:

A) marginal product is falling.
B) marginal product is rising.
C) marginal product is negative.
D) one cannot determine whether marginal product is falling or rising.

Question 73

In the above diagram the range of diminishing marginal returns is:

A) 0Q₃.
B) 0Q₂.
C) Q₁Q₂.
D) Q₁Q₃.

Question 74

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 75

Refer to the above diagram.At output level Q total variable cost is:

A) 0BEQ.
B) BCDE.
C) 0CDQ.
D) 0AFQ.

Question 76

When total product is diminishing,marginal product is:

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

Question 77

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 78

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 79

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 80

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

A) Harvest labor
B) Hail insurance
C) Fertilizer
D) Seed