Question 1

The reason economists and accountants have problems using cost analysis in the real world is that:
A) economists do not believe in the existence of explicit costs.
B) although implicit costs do not show up in accounting profits, they nevertheless affect managerial decisions.
C) although explicit costs do not show up in accounting profits, they nevertheless affect managerial decisions.
D) explicit costs cannot be measured.

Accepted Answer

Implicit costs, while not recorded in accounting profits, are crucial for managerial decision-making as they represent opportunity costs that impact the overall economic profit.

Question 2

A production table can be used to determine:
A) a firm's profits.
B) a firm's costs.
C) how much output is produced from a given quantity of inputs.
D) how much of a product will be demanded by consumers.

Accepted Answer

A production table shows the relationship between inputs and the resulting output, helping to determine how much output is produced from a given quantity of inputs.

Question 3

Can accounting profit be positive while economic profits are negative?
A) No. The two concepts are identical.
B) Yes, if total revenue covers opportunity costs but not explicit costs.
C) Yes, if total revenue covers explicit costs but not opportunity costs.
D) No. Economic profits must always be larger than accounting profits.

Accepted Answer

Accounting profit can be positive if total revenue covers explicit costs, but economic profit can be negative if opportunity costs are not covered. Economic profit considers both explicit and implicit (opportunity) costs.

Question 4

Owen runs a delivery business and currently employs three drivers. He owns three vans that employees use to make deliveries, but he is considering hiring a fourth driver. If he hires a fourth driver, he can schedule breaks and lunch hours so that all three vans are in constant use, allowing him to increase deliveries per day from 60 to 75. It will cost an additional $75 per day to hire the fourth driver. The marginal cost per delivery of increasing output beyond 60 deliveries per day:
A) is $0 since Owen does not have to purchase another van.
B) is $5.
C) is $75.
D) cannot be calculated without knowing Owen's total fixed costs.

Accepted Answer

The marginal cost per delivery is calculated by dividing the additional cost by the additional number of deliveries. The additional cost is $75 for the fourth driver, and the additional deliveries are 15 (75-60), so the marginal cost per delivery is $75/15 = $5.

Question 5

Implicit and explicit revenues minus implicit and explicit costs equals:
A) accounting profit.
B) economic profit.
C) zero profit.
D) implicit profit.

Accepted Answer

The answer of Implicit and explicit revenues minus implicit and...

Question 6

In the short run:
A) all inputs are variable.
B) firms can use any input combination they want.
C) firms can choose among all possible production techniques.
D) some inputs are fixed.

Accepted Answer

In the short run, some inputs are fixed, meaning they cannot be changed or adjusted, while others are variable.

Question 7

In the long run:
A) no inputs can be varied and all inputs are fixed.
B) some inputs can be varied and some inputs are fixed.
C) some inputs can be varied and no inputs are fixed.
D) all inputs can be varied and no inputs are fixed.

Accepted Answer

In the long run, all inputs are variable, meaning that firms can adjust all factors of production, such as labor, capital, and land, to achieve the desired level of output.

Question 8

Rachel left her job as a graphic artist, where she earned $42,000 per year, to open her own graphic arts firm. Her explicit costs for her new business include:
A) only the expenses incurred for office space, equipment, and supplies.
B) only her forgone salary of $42,000 per year.
C) both the expenses incurred for office space, equipment, and supplies and her forgone salary of $42,000 per year.
D) neither the expenses incurred for office space, equipment, and supplies nor her forgone salary of $42,000 per year.

Accepted Answer

Explicit costs refer to direct, out-of-pocket expenses such as office space, equipment, and supplies, not the forgone salary.

Question 9

Economic profit is:
A) total revenue minus explicit measurable costs.
B) explicit revenues minus explicit costs.
C) implicit and explicit revenues minus implicit and explicit costs.
D) implicit and explicit revenues minus implicit costs.

Accepted Answer

Economic profit is calculated by subtracting both implicit and explicit costs from total revenues, which include both implicit and explicit revenues.

Question 10

Robert withdrew $100,000 from an account that paid 10 percent annual interest and used the funds to purchase real estate. After one year he sold the property for $120,000. The accounting profit on this deal was:
A) $120,000.
B) $100,000.
C) $20,000.
D) $10,000.

Accepted Answer

The accounting profit is calculated as the selling price minus the initial investment. Robert sold the property for $120,000 and initially invested $100,000, so the accounting profit is $120,000 - $100,000 = $20,000.

Question 11

Implicit cost refers to:
A) the amount a firm receives for selling its product or service.
B) any increase in the value of the assets owned by the firm.
C) the opportunity cost of factors of production provided by the owners of the firm.
D) salary paid to the factors of production.

Accepted Answer

Implicit cost is the opportunity cost of using resources owned by the firm for its own production, rather than selling or renting them out.

Question 12

Long-run decisions are:
A) constrained because all inputs are variable.
B) constrained because all inputs are fixed.
C) constrained because some inputs are fixed and others are variable.
D) unconstrained because all inputs are variable.

Accepted Answer

In the long run, all inputs are variable, allowing firms to adjust all factors of production without constraints.

Question 13

Rachel left her job as a graphic artist, where she earned $42,000 per year, to open her own graphic arts firm. Her implicit costs of the new business include:
A) only the expenses incurred for office space, equipment, and supplies.
B) only her forgone salary of $42,000 per year.
C) both the expenses incurred for office space, equipment, and supplies and her forgone salary of $42,000 per year.
D) neither the expenses incurred for office space, equipment, and supplies nor her forgone salary of $42,000 per year.

Accepted Answer

Implicit costs refer to the opportunity costs of using resources owned by the business, such as the forgone salary Rachel could have earned if she stayed at her previous job.

Question 14

Which of the following is the best example of a long-run decision?
A) An automobile manufacturing company considering whether to invest in robotic equipment to develop a more cost-effective production technique.
B) An automobile manufacturing company considering whether to expand its existing workforce while keeping the same factory and equipment.
C) A business consulting firm considering whether to hire some interns to assist with research and data processing.
D) A business consulting firm considering whether to add new computers while maintaining the same number of employees.

Accepted Answer

Long-run decisions involve changes to all inputs, including capital investments like robotic equipment, which can significantly alter production techniques and capacity.

Question 15

Short-run decisions are:
A) constrained because all inputs are variable.
B) constrained because all inputs are fixed.
C) constrained because some inputs are fixed and others are variable.
D) unconstrained because all inputs are variable.

Accepted Answer

In the short run, some inputs are fixed while others are variable, which constrains decision-making.

Question 16

The difference between economic profit and accounting profit is equal to:
A) zero.
B) implicit and explicit costs.
C) implicit and explicit revenues.
D) implicit revenues minus implicit costs.

Accepted Answer

Economic profit accounts for both explicit and implicit costs, while accounting profit only considers explicit costs. Therefore, the difference between them is the implicit costs, which is represented by implicit revenues minus implicit costs.

Question 17

In the short run:
A) some inputs are variable and no inputs are fixed.
B) some inputs are variable and some inputs are fixed.
C) no inputs are variable and all inputs are fixed.
D) no inputs are variable and some inputs are fixed.

Accepted Answer

In the short run, firms can change some inputs (variable inputs) but not others (fixed inputs).

Question 18

A regional airline owns 10 aircraft and employs 20 pilots. The airline makes an average of three trips per day with each of its 10 aircraft. The aircraft and their ground crews are idle part of the day. Minimum rest requirements for its pilots mean that if the airline wants to increase its flights, it must hire more pilots. The decision to hire more pilots is:
A) a short-run decision because the number of aircraft is held constant while the labor input is changed.
B) a short-run decision because the number of pilots is being increased; if the number of ground crew were decreased instead, it would be a long-run decision.
C) a long-run decision because hiring pilots will increase revenues over a long period of time for the airline.
D) a long-run decision because customers will become accustomed to the new flight schedule.

Accepted Answer

In the short run, at least one factor of production is fixed. Here, the number of aircraft is fixed, and the airline is changing the labor input by hiring more pilots, making it a short-run decision.

Question 19

Rachel left her job as a graphic artist, where she earned $42,000 per year, to open her own graphic arts firm. Her total costs of the new business include:
A) only the expenses incurred for office space, equipment, and supplies.
B) only her forgone salary of $42,000 per year.
C) both the expenses incurred for office space, equipment, and supplies and her forgone salary of $42,000 per year.
D) neither the expenses incurred for office space, equipment, and supplies nor her forgone salary of $42,000 per year.

Accepted Answer

Rachel's total costs include both the explicit costs (expenses for office space, equipment, and supplies) and the implicit costs (her forgone salary of $42,000 per year).

Question 20

Which of the following is an example of a short-run decision?
A) An automobile manufacturing company considering whether to invest in robotic equipment to develop a more cost-effective production technique.
B) An automobile manufacturing company considering whether to expand its existing workforce.
C) A business consulting firm considering whether to open a new office in another city where many of its clients are based.
D) A business consulting firm considering whether to hire new consultants, move to a larger space, and purchase additional equipment.

Accepted Answer

In the short run, firms make decisions that involve changes in variable inputs like labor, rather than fixed inputs like capital or infrastructure. Expanding the workforce is a short-run decision as it involves adjusting labor, a variable input.

Quiz 11: Production and Cost Analysis I

The reason economists and accountants have problems using cost analysis in the real world is that:

A production table can be used to determine:

Can accounting profit be positive while economic profits are negative?

Implicit and explicit revenues minus implicit and explicit costs equals:

In the short run:

In the long run:

Rachel left her job as a graphic artist, where she earned $42,000 per year, to open her own graphic arts firm. Her explicit costs for her new business include:

Economic profit is:

Robert withdrew $100,000 from an account that paid 10 percent annual interest and used the funds to purchase real estate. After one year he sold the property for $120,000. The accounting profit on this deal was:

Implicit cost refers to:

Long-run decisions are:

Rachel left her job as a graphic artist, where she earned $42,000 per year, to open her own graphic arts firm. Her implicit costs of the new business include:

Which of the following is the best example of a long-run decision?

Short-run decisions are:

The difference between economic profit and accounting profit is equal to:

In the short run:

Rachel left her job as a graphic artist, where she earned $42,000 per year, to open her own graphic arts firm. Her total costs of the new business include:

Which of the following is an example of a short-run decision?