Deck 12: The Costs of Production

Question 1

Economists assume that the goal of the firm is to maximize total

A) revenue.
B) profits.
C) costs.
D) satisfaction.

Answer 1

B

Question 2

Economists in the field of industrial organization study how

A) central banking policies affect financial markets.
B) firms' demand for labor and individuals' supply of labor affect resource markets.
C) firms' decisions about prices and quantities depend on market conditions.
D) externalities and public goods affect the environment.

Answer 2

C

Question 3

Analyzing the behavior of the firm enhances our understanding of

A) what decisions lie behind the market supply curve.
B) how consumers allocate their income to purchase scarce resources.
C) how financial institutions set interest rates.
D) whether resources are allocated fairly.

Answer 3

A

Question 4

Economists normally assume that the goal of a firm is to i) earn profits as large as possible, even if it means reducing output.
Ii) earn revenues as large as possible, even if it means reducing profits.
Iii) minimize costs, regardless of profits.

A) i) only
B) i) and ii) only
C) ii) and iii) only
D) i), ii), and iii)

Question 5

Total revenue equals

A) price x quantity.
B) price/quantity.
C) price x quantity) - total cost.
D) output - input.

Question 6

Economists assume that the typical person who starts her own business does so with the intention of

A) donating the profits from her business to charity.
B) capturing the highest number of sales in her industry.
C) maximizing profits.
D) minimizing costs.

Question 7

Economists normally assume that the goal of a firm is to earn i) profits as large as possible, even if it means reducing output.
Ii) profits as large as possible, even if it means incurring a higher total cost.
Iii) revenues as large as possible, even if it reduces profits.

A) i) and ii) only
B) i) and iii) only
C) ii) and iii) only
D) i), ii), and iii)

Question 8

An entrepreneur's motivation to start a business arises from

A) an innate love for the type of business that he or she starts.
B) a desire to earn a profit.
C) an altruistic desire to provide the world with a good product.
D) All of the above could be correct.

Question 9

To an economist, the field of industrial organization answers which of the following questions?

A) Why are consumers subject to the law of demand?
B) Why do firms experience diminishing marginal productivities of their inputs?
C) How does the number of firms affect prices and the efficiency of market outcomes?
D) How can government intervention improve industrial production when externalities are present?

Question 10

If Danielle sells 300 wrist bands for $0.50 each, her total revenues are

A) $150.
B) $299.50.
C) $300.
D) $600.

Question 11

Economists normally assume that the goal of a firm is to i) sell as much of its product as possible.
Ii) set the price of the product as high as possible.
Iii) maximize profit.

A) i) and ii) only
B) ii) and iii) only
C) iii) only
D) i), ii), and iii)

Question 12

When a firm is making a profit-maximizing production decision, which of the following principles of economics is likely to be most important to the firm's decision?

A) The cost of something is what you give up to get it.
B) A country's standard of living depends on its ability to produce goods and services.
C) Prices rise when the government prints too much money.
D) Governments can sometimes improve market outcomes.

Question 13

Industrial organization is the study of

A) how labor unions organize workers in industries.
B) which managers are the most successful.
C) how industries organize for political advantage.
D) how firms' decisions regarding prices and quantities depend on the market conditions they face.

Question 14

A student might describe information about the costs of production as

A) dry and technical.
B) boring.
C) crucial to understanding firms and market structures.
D) All of the above could be correct.

Question 15

Which of the following can be added to profit to obtain total revenue?

A) net profit
B) capital profit
C) operational profit
D) total cost

Question 16

Total revenue equals

A) marginal revenue - marginal cost.
B) price/quantity.
C) price x quantity.
D) output - input.

Question 17

Which field of economics studies how the number of firms affects the prices in a market and the efficiency of market outcomes?

A) macroeconomics
B) industrial organization
C) labor economics
D) monetary economics

Question 18

The amount of money that a firm receives from the sale of its output is called

A) total gross profit.
B) total net profit.
C) total revenue.
D) net revenue.

Question 19

Economists normally assume that the goal of a firm is to

A) maximize its total revenue.
B) maximize its profit.
C) minimize its explicit costs.
D) minimize its total cost.

Question 20

If Kevin's children run a lemonade stand for a day and sell 200 glasses of lemonade at $0.50 each, their total revenues are

A) $100.
B) $199.50.
C) $200.
D) $400.

Question 21

Total cost is the

A) amount a firm receives for the sale of its output.
B) fixed cost less variable cost.
C) market value of the inputs a firm uses in production.
D) quantity of output minus the quantity of inputs used to make a good.

Question 22

Profit is defined as

A) net revenue minus depreciation.
B) total revenue minus total cost.
C) average revenue minus average total cost.
D) marginal revenue minus marginal cost.

Question 23

Stick Storage manufactures and sells computer flash drives. Last year it sold 2 million flash drives at a price of $10 each. For last year, the firm's

A) accounting profit was $20 million.
B) economic profit was $20 million.
C) total revenue was $20 million.
D) explicit costs was $20 million.

Question 24

Ryan sells 200 plastic ball point pens at $0.50 each. His total costs are $25. His profits are

A) $25.
B) $75.
C) $100.
D) $175.

Question 25

The amount of money that a firm pays to buy inputs is called

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

Question 26

A dairy produces and sells organic milk. Last year it sold 500,000 gallons of milk at a price of $7 per gallon. For last year, the firm's

A) total revenue was $3.5 million.
B) economic profit was $3.5 million.
C) accounting profit was $3.5 million.
D) explicit costs were $3.5 million.

Question 27

Carol Anne makes candles. If she charges $20 for each candle, her total revenue will be

A) $1,000 if she sells 100 candles.
B) $500 if she sells 25 candles.
C) $20 regardless of how many candles she sells.
D) $200 if she sells 5 candles.

Question 28

Kelly has decided to start his own business giving sailing lessons. To purchase equipment for the business, Kelly withdrew $1,000 from his savings account, which was earning 3% interest, and borrowed an additional $2,000 from the bank at an interest rate of 7%. What is Kelly's annual opportunity cost of the financial capital that has been invested in the business?

A) $30
B) $140
C) $170
D) $300

Question 29

Shelley's Salsa produces and sells organic salsa. Last year it sold 3 million tubs of salsa at a price of $3 per tub. For last year, the firm's

A) accounting profit was $9 million.
B) economic profit was $9 million.
C) total revenue was $9 million.
D) explicit costs were $9 million.

Question 30

Profit is defined as total revenue

A) plus total cost.
B) times total cost.
C) minus total cost.
D) divided by total cost.

Question 31

The Carolina Christmas Tree Corporation grows and sells 500 Christmas trees. The average cost of production per tree is $50. Each tree sells for a price of $65. The Carolina Christmas Tree Corporation's total revenues are

A) $7,500.
B) $25,000.
C) $32,500.
D) $67,500.

Question 32

Marcus sells 300 candy bars at $0.50 each. His total costs are $125. His profits are

A) $25.
B) $124.50.
C) $125.
D) $150.

Question 33

The things that must be forgone to acquire a good are called

A) implicit costs.
B) opportunity costs.
C) explicit costs.
D) accounting costs.

Question 34

Trevor's Tire Company produced and sold 500 tires. The average cost of production per tire was $50. Each tire sold for a price of $65. Trevor's Tire Company's total profits are

A) $7,500.
B) $25,000.
C) $32,500.
D) $67,500.

Question 35

The Three Amigo's company produced and sold 500 dog beds. The average cost of production per dog bed was $50. Each dog be sold for a price of $65. The Three Amigo's total costs are

A) $7,500.
B) $25,000.
C) $32,500.
D) $67,500.

Question 36

Bubba is a shrimp fisherman who catches 4,000 pounds of shrimp per year. He can sell the shrimp for $5 per pound. His average total cost of catching shrimp is $3 per pound. Bubba's annual total revenue is

A) $8,000.
B) $12,000.
C) $20,000.
D) $32,000.

Question 37

Billy's Bean Bag Emporium produced 300 bean bag chairs but sold only 275 of the units it produced. The average cost of production for each unit of output produced was $100. The price for each of the 275 units sold was $95. Total profit for Billy's Bean Bag Emporium would be

A) -$3,875.
B) $26,125.
C) $28,500.
D) $30,000.

Question 38

A firm's opportunity costs of production are equal to its

A) explicit costs only.
B) implicit costs only.
C) explicit costs + implicit costs.
D) explicit costs + implicit costs + total revenue.

Question 39

Tsintah weaves traditional Navaho rugs. She weaves and sells 50 rugs. Her average cost of production per rug is $50. She sells each rug for a price of $65. Tsintah's total revenues are

A) $750.
B) $2,500.
C) $3,250.
D) $5,750.

Question 40

Jamar used to work as an office manager, earning $40,000 per year. He gave up that job to start a life-coaching business. In calculating the economic profit of his life-coaching business, the $40,000 income that he gave up is counted as part of the life-coaching business's

A) total revenue.
B) opportunity costs.
C) explicit costs.
D) marginal costs.

Question 41

Gwen has decided to start her own photography studio. To purchase the necessary equipment, Gwen withdrew $2,000 from her savings account, which was earning 3% interest, and borrowed an additional $4,000 from the bank at an interest rate of 7%. What is Gwen's annual opportunity cost of the financial capital that has been invested in the business?

A) $60
B) $280
C) $340
D) $660

Question 42

Frank owns a dog-grooming business. Which of the following costs would be implicit costs? i) dog shampoo
Ii) rent on the storefront
Iii) wages Frank could earn as a substitute elementary-school teacher
Iv) interest that Frank's money was earning before he spent his savings to set up the dog­
Grooming business

A) i) and ii) only
B) iv) only
C) iii) and iv) only
D) i), ii), iii), and iv)

Question 43

Which of the following statements is correct?

A) Opportunity costs equal explicit minus implicit costs.
B) Economists consider opportunity costs to be included in a firm's total revenues.
C) Economists consider opportunity costs to be included in a firm's costs of production.
D) All of the above are correct.

Question 44

Bubba is a shrimp fisherman who could earn $5,000 as a fishing tour guide. Instead, he is a full-time shrimp fisherman. In calculating the economic profit of his shrimp business, the $5,000 that Bubba gave up is counted as part of the shrimp business's

A) total revenue.
B) explicit costs.
C) implicit costs.
D) marginal costs.

Question 45

Bubba is a shrimp fisherman who used $2,000 from his personal savings account to buy a boat and equipment for his shrimp business. The savings account paid 2% interest. What is Bubba's annual opportunity cost of the financial capital that he invested in his business?

A) $20
B) $40
C) $200
D) $400

Question 46

Explicit costs

A) do not require an outlay of money by the firm.
B) enter into the accountant's measurement of a firm's profit.
C) enter into the economist's measurement of a firm's profit.
D) Both b and c are correct.

Question 47

Patrice owns a travel agency. Her accountant most likely includes which of the following costs on her financial statements?

A) wages Patrice could earn giving tennis lessons
B) dividends Patrice's money was earning in the stock market before Patrice sold her stock and leased the space for her travel agency
C) the cost of utilities for operating the storefront
D) Both b and c are correct.

Question 48

Explicit costs

A) require an outlay of money by the firm.
B) include all of the firm's opportunity costs.
C) include the value of the business owner's time.
D) Both b and c are correct.

Question 49

Which of the following is an example of an implicit cost? i) the owner of a firm forgoing an opportunity to earn a large salary working for a Wall Street brokerage firm
Ii) interest paid on the firm's debt
Iii) rent paid by the firm to lease office space

A) ii) and iii) only
B) i) and iii) only
C) i) only
D) iii) only

Question 50

Pete owns a shoe-shine business. His accountant most likely includes which of the following costs on his financial statements? i) shoe polish
Ii) rent on the shoe stand
Iii) wages Pete could earn delivering newspapers
Iv) interest that Pete's money was earning before he spent his savings to set up the shoe­
Shine business

A) i) only
B) i) and ii) only
C) iii) and iv) only
D) i), ii), iii), and iv)

Question 51

The amount of money that a wheat farmer could have earned if he had planted barley instead of wheat is

A) an explicit cost.
B) an accounting cost
C) an implicit cost.
D) forgone accounting profit.

Question 52

Katya owns a math-tutoring business. Her accountant most likely includes which of the following costs on her financial statements? i) workbooks containing practice problems
Ii) rent for the storefront
Iii) wages Katya could earn as a bookkeeper
Iv) interest that Katya's money was earning before she spent her savings to set up the
Tutoring business

A) i) only
B) i) and ii) only
C) iii) and iv) only
D) i), ii), iii), and iv)

Question 53

A difference between explicit and implicit costs is that

A) explicit costs must be greater than implicit costs.
B) explicit costs do not require a direct monetary outlay by the firm, whereas implicit costs do.
C) implicit costs do not require a direct monetary outlay by the firm, whereas explicit costs do.
D) implicit costs must be greater than explicit costs.

Question 54

Pete owns a shoe-shine business. Which of the following costs would be implicit costs? i) shoe polish
Ii) rent on the shoe stand
Iii) wages Pete could earn delivering newspapers
Iv) interest that Pete's money was earning before he spent his savings to set up the shoe­shine business

A) i) and ii) only
B) iv) only
C) iii) and iv) only
D) i), ii), iii), and iv)

Question 55

Implicit costs

A) do not require an outlay of money by the firm.
B) do not enter into the economist's measurement of a firm's profit.
C) are also known as variable costs.
D) are not part of an economist's measurement of opportunity cost.

Question 56

An example of an explicit cost of production would be the

A) cost of forgone labor earnings for an entrepreneur.
B) lost opportunity to invest in capital markets when the money is invested in one's business.
C) lease payments for the land on which a firm's factory stands.
D) Both a and c are correct.

Question 57

An example of an opportunity cost that is also an implicit cost is

A) a lease payment.
B) the cost of raw materials.
C) the value of the business owner's time.
D) All of the above are correct.

Question 58

Which of the following would be an example of an implicit cost? i) forgone investment opportunities
Ii) wages of workers
Iii) raw materials costs

A) i) only
B) ii) only
C) ii) and iii) only
D) i) and iii) only

Question 59

The value of a business owner's time is an example of

A) an opportunity cost.
B) a fixed cost.
C) an explicit cost.
D) total revenue.

Question 60

Anya has decided to start her own hair-styling salon. To purchase the necessary equipment, Anya withdrew $10,000 from her savings account, which was earning 3% interest, and borrowed an additional $5,000 from the bank at an interest rate of 8%. What is Anya's annual opportunity cost of the financial capital that has been invested in the business?

A) $300
B) $400
C) $700
D) $1,650

Question 61

The difference between accounting profit and economic profit is

A) explicit costs.
B) implicit costs.
C) total revenue.
D) marginal product.

Question 62

Tom quit his $65,000 a year corporate lawyer job to open up his own law practice. In Tom's first year in business his total revenue equaled $150,000. Tom's explicit cost during the year totaled $85,000. What is Tom's economic profit for his first year in business?

A) $0
B) $20,000
C) $65,000
D) $85,000

Question 63

Total revenue minus both explicit and implicit costs is called

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

Question 64

Walter used to work as a high school teacher for $40,000 per year but quit in order to start his own painting business. To invest in his painting business, he withdrew $20,000 from his savings, which paid 3 percent interest, and borrowed $30,000 from his uncle, whom he pays 3 percent interest per year. Last year Walter paid $25,000 for supplies and had revenue of $60,000. Walter asked Tyler the accountant and Greg the economist to calculate his painting business's costs.

A) Tyler says his costs are $25,900, and Greg says his costs are $66,500.
B) Tyler says his costs are $25,000, and Greg says his costs are $65,000.
C) Tyler says his costs are $66,500, and Greg says his costs are $66,500.
D) Tyler says his costs are $75,000, and Greg says his costs are $41,500.

Question 65

Economic profit

A) will never exceed accounting profit.
B) is most often equal to accounting profit.
C) is always at least as large as accounting profit.
D) is a less complete measure of profitability than accounting profit.

Question 66

Which of the following statements is correct?

A) Assuming that explicit costs are positive, economic profit is greater than accounting profit.
B) Assuming that implicit costs are positive, accounting profit is greater than economic profit.
C) Assuming that explicit costs are positive, accounting profit is equal to economic profit.
D) Assuming that implicit costs are positive, economic profit is positive.

Question 67

Total revenue minus only implicit costs is called

A) accounting profit.
B) economic profit.
C) opportunity cost.
D) None of the above is correct.

Question 68

Foregone investment opportunities are an example of

A) an explicit cost.
B) an implicit cost.
C) revenues.
D) profits.

Question 69

Katherine gives piano lessons for $15 per hour. She also grows flowers, which she arranges and sells at the local farmer's market. One day she spends 5 hours planting $50 worth of seeds in her garden. Once the seeds have grown into flowers, she can sell them for $150 at the farmer's market. Katherine's accounting profits are

A) $100, and her economic profits are $25.
B) $100, and her economic profits are $75.
C) $25, and her economic profits are $100.
D) $75, and her economic profits are $125.

Question 70

Accounting profit is equal to

A) marginal revenue minus marginal cost.
B) total revenue minus the explicit cost of producing goods and services.
C) total revenue minus the opportunity cost of producing goods and services.
D) average revenue minus the average cost of producing the last unit of a good or service.

Question 71

When calculating a firm's profit, an economist will subtract only

A) explicit costs from total revenue because these are the only costs that can be measured explicitly.
B) implicit costs from total revenue because these include both the costs that can be directly measured as well as the costs that can be indirectly measured.
C) the opportunity costs from total revenue because these include both the implicit and explicit costs of the firm.
D) the marginal cost because the cost of the next unit is the only relevant cost.

Question 72

The difference between accounting profit and economic profit relates to

A) the manner in which revenues are defined.
B) how marginal revenue is calculated.
C) the manner in which costs are defined.
D) the price of the good in the market.

Question 73

Katherine gives piano lessons for $20 per hour. She also grows flowers, which she arranges and sells at the local farmer's market. One day she spends 5 hours planting $50 worth of seeds in her garden. Once the seeds have grown into flowers, she can sell them for $150 at the farmer's market. Katherine's accounting profits are

A) $100, and her economic profits are $100.
B) $100, and her economic profits are $0.
C) $0, and her economic profits are $100.
D) $0, and her economic profits are $-100.

Question 74

Bev is opening her own court-reporting business. She financed the business by withdrawing money from her personal savings account. When she closed the account, the bank representative mentioned that she would have earned $300 in interest next year. If Bev hadn't opened her own business, she would have earned a salary of $25,000. In her first year, Bev's revenues were $30,000. Which of the following statements is correct?

A) Bev's total explicit costs are $25,300.
B) Bev's total implicit costs are $300.
C) Bev's accounting profits exceed her economic profits by $300.
D) Bev's economic profit is $4,700.

Question 75

Walter used to work as a high school teacher for $40,000 per year but quit in order to start his own painting business. To invest in his painting business, he withdrew $20,000 from his savings, which paid 3 percent interest, and borrowed $30,000 from his uncle, whom he pays 3 percent interest per year. Last year Walter paid $25,000 for supplies and had revenue of $60,000. Walter asked Tyler the accountant and Greg the economist to calculate his painting business's profit.

A) Tyler says his profit is $25,900, and Greg says his profit is $66,500.
B) Tyler says his profit is $35,000, and Greg says he lost $5,900.
C) Tyler says his profit is $34,100, and Greg says he lost $6,500.
D) Tyler says his profit is $34,100, and Greg says his profit is $34,100.

Question 76

Jacqui decides to open her own business and earns $50,000 in accounting profit the first year. When deciding to open her own business, she turned down three separate job offers with annual salaries of $30,000, $40,000, and $45,000. What is Jacqui's economic profit from running her own business?

A) $-55,000
B) $-5,000
C) $5,000
D) $20,000

Question 77

Total revenue minus only explicit costs is called

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

Question 78

Jane was a partner at a law firm earning $223,000 per year. She left the firm to open her own law practice. In the first year of business she generated revenues of $347,000 and incurred explicit costs of $163,000. Jane's economic profit from her first year in her own practice is

A) -$39,000.
B) $124,000.
C) $163,000.
D) $184,000.

Question 79

Economic profit is equal to total revenue minus the

A) explicit cost of producing goods and services.
B) opportunity cost of producing goods and services.
C) accounting cost of producing goods and services.
D) implicit cost of producing goods and services.

Question 80

Which of the following is an example of an implicit cost?

A) salaries paid to owners who work for the firm
B) interest on money borrowed to finance equipment purchases
C) cash payments for raw materials
D) foregone rent on office space owned and used by the firm