Question 1

The payment of wages by a firm is an example of:
A)an explicit cost of production.
B)an implicit cost of production.
C)an irreversible cost of production.
D)a long-run cost of production.

Accepted Answer

Payment of wages is a direct and explicit cost incurred by a firm for employing labor to produce goods or services.

Question 2

Economic profit is equal to the difference between:
A)total revenue and the full opportunity cost of all the resources used in production.
B)total revenue and implicit costs.
C)accounting profit and explicit costs.
D)implicit and explicit costs.

Accepted Answer

Economic profit takes into account the full opportunity cost of all the resources used in production, including both implicit and explicit costs. Therefore, it is the difference between total revenue and the full opportunity cost of all resources used. Choice B only considers implicit costs, while choice C only considers explicit costs. Choice D is incorrect because economic profit is the difference between both implicit and explicit costs.

Question 3

Which of the following is not a determinant of a firm's cost functions?
A)The production function.
B)The price of labor.
C)The productivity of the firm's capital stock.
D)The price of the firm's output.

Accepted Answer

The price of the firm's output is not a determinant of the firm's cost functions. The cost functions are determined by factors such as the production function, price of labor, and productivity of the firm's capital stock.

Question 4

Which of the following statements regarding historical costs is correct?
A)Historical costs represent what the firm paid for an input when it was purchased, adjusted for inflation.
B)Historical costs vary depending on the method of depreciation a firm uses.
C)Historical costs are a good indicator of the current opportunity cost of a piece of capital.
D)Using historical costs can cause true economic profit to be under or over stated.

Accepted Answer

Historical costs do not take into account changes in market prices or the opportunity cost of using a resource in a different way. Therefore, using historical costs can lead to under or overstatement of true economic profit.

Question 5

Which of the following is the best example of "depreciation"?
A)An individual worker becoming tired at the end of an eight-hour work day.
B)The notion that individuals obtain less utility from paying taxes than giving to charities.
C)A truck used by a pizzeria to make deliveries is worth less at the end of one year.
D)A rise in prices depreciating the value of consumers' real incomes.

Accepted Answer

Depreciation refers to the decline in the value of an asset over time through wear and tear, obsolescence, or some other factor. In this case, the truck used by the pizzeria is an example of depreciation because it is worth less at the end of one year due to its use in deliveries. Option A refers to human fatigue, option B refers to personal preferences, and option D refers to inflation, which is not the same as depreciation.

Question 6

Marginal product equals 0 when:
A)average product equals zero.
B)total product equals average product.
C)average product reached its minimum value.
D)total product reaches its maximum value.

Accepted Answer

The marginal product equals 0 when the total product reaches its maximum value. This is because the marginal product measures the change in total output that results from a one-unit change in the input. When total product is at its maximum, additional inputs do not increase output, hence the marginal product is zero.

Question 7

Which of the following is true of the typical relationship between marginal product (MP)and average product (AP)?
A)If MP is greater than AP, then AP is falling.
B)The AP curve intersects the MP curve at minimum MP.
C)The MP curve intersects the AP curve at maximum AP.
D)If MP is less than AP, then AP is increasing.

Accepted Answer

The MP curve intersects the AP curve at maximum AP. This is because when MP is higher than AP, it pulls the AP curve upwards, causing it to increase. When MP is lower than AP, it pulls the AP curve downwards, causing it to decrease. The intersection occurs at the point where MP equals AP, where the AP curve is neither rising nor falling, which is the point of maximum AP.

Question 8

Which of the following is an example of an "implicit cost"?
A)Interest that could have been earned on retained earnings used by the firm to finance expansion.
B)The payment of rent by the firm for the building in which it is housed.
C)The interest payment made by the firm for funds borrowed from a bank.
D)The payment of wages by the firm.

Accepted Answer

Implicit costs are those costs that are not actually paid in cash but represent forgone opportunities. Interest that could have been earned on retained earnings is an example of an implicit cost because it represents the opportunity cost of not investing the funds in an interest-bearing account, but instead using them for expansion. The other options are examples of explicit costs that involve actual cash payments.

Question 9

All else constant,an increase in productivity has the effect of causing:
A)the marginal product of labor to increase and no effect on the average product of labor.
B)the average product of labor to increase and no effect on the marginal product of labor.
C)the marginal product of labor to increase and the average product of labor to decrease.
D)both the marginal and average product of labor to increase.

Accepted Answer

An increase in productivity means that output per unit of input, such as labor, increases. This will lead to both the marginal and average product of labor to increase, as the same amount of labor can produce more output.

Question 10

Which of the following statements is false?
A)Economic costs include the opportunity costs of the resources owned by the firm.
B)Accounting costs typically include only explicit costs.
C)Economic profit will always be less than accounting profit if resources owned and used by the firm have any opportunity costs.
D)Accounting profit is equal to total revenue minus implicit costs.

Accepted Answer

Accounting profit is equal to total revenue minus explicit costs, not implicit costs. Economic profit takes into account the opportunity cost of resources, including implicit costs.

Question 11

Suppose a sole proprietorship is earning total revenues of $100,000 and is incurring explicit costs of $75,000.If the owner could work for another company for $30,000 a year,we would conclude that:
A)the firm is incurring an economic loss.
B)implicit costs are $25,000.
C)the total economic costs are $100,000.
D)the individual is earning an economic profit of $25,000.

Accepted Answer

To calculate economic profit, we need to subtract total economic costs from total revenues. Total revenue in this case is $100,000 and total economic costs include both explicit costs ($75,000) and implicit costs (the opportunity cost of the owner's time, which is $30,000). Total economic costs, therefore, are $105,000 ($75,000 + $30,000). Since total revenue is less than total economic costs, the firm is incurring an economic loss.

Question 12

The amount of money a firm pays to lease a building it uses for office space is called:
A)the full opportunity cost of production.
B)an explicit cost.
C)a real cost of production.
D)an implicit cost.

Accepted Answer

The amount of money a firm pays to lease a building for office space is an explicit cost. Explicit costs are direct payments made by the firm for the factors of production, such as rent, wages, and utilities.

Question 13

Diminishing marginal returns occur when:
A)units of a variable input are added to a fixed input and total product falls.
B)units of a variable input are added to a fixed input and marginal product falls.
C)the size of the plant is increased in the long run.
D)the quantity of the fixed input is increased and returns to the variable input fall.

Accepted Answer

Diminishing marginal returns occur when additional units of a variable input, such as labor or capital, are added to a fixed input, such as land or machinery, and the marginal product of that variable input decreases. This means that each additional unit of the variable input will generate less output than the previous unit, leading to a decline in the overall productivity of the production process. Option A is incorrect because total product may still increase with diminishing marginal returns, but at a decreasing rate. Option C is unrelated to the concept of marginal returns, as it refers to the long-run adjustment of the size of the production facility. Option D is also incorrect because while increasing the quantity of fixed inputs can eventually lead to diminishing returns to scale, it does not cause diminishing marginal returns in the short run.

Question 14

Fred is considering opening a ski shop in Colorado.Assume Fred will incur the following costs: building rent = $100,000/year,inventory = $250,000/year,energy = $50,000/year,and labor (one clerk)= $10,000/year.In addition,Fred's current income as a computer programmer is $40,000 per year.Assuming Fred would earn $460,000 in revenues,he could expect to earn:
A)an accounting profit of $10,000 per year.
B)an accounting profit of $60,000 per year.
C)an economic profit of $10,000 per year.
D)an economic profit of $50,000 per year.

Accepted Answer

The answer of Fred is considering opening a ski shop...

Question 15

An implicit cost is defined as:
A)the opportunity cost of using a resource that is not explicitly paid out by the firm.
B)the difference between an input's explicit cost and its actual cost.
C)the amount by which economic profit exceeds accounting profit.
D)the amount by which the money spent on an input to production exceeds its opportunity cost.

Accepted Answer

An implicit cost is the opportunity cost of using a resource that is not explicitly paid out by the firm. It is the cost of using a resource in a way that prevents it from being used in its best alternative use. Implicit costs are not reflected in accounting statements, but they are important to consider when making business decisions.

Question 16

Which of the following statements is correct?
A)Workers employed by General Motors are approximately twice as productive as their Japanese counterparts.
B)Between 1979 and 1998, Chrysler and Ford eliminated the productivity gap between all of their production facilities and their Japanese counterparts.
C)The increase in productivity Japanese manufacturers experienced in the early 1980s was the result primarily of changes in management focusing on inventory systems and plant layout.
D)Auto workers in the United States are less productive than their Japanese counterparts primarily due to the higher wages U.S. workers receive.

Accepted Answer

The statement that the increase in productivity Japanese manufacturers experienced in the early 1980s was the result primarily of changes in management focusing on inventory systems and plant layout is supported by research and literature on the subject. The other statements present inaccurate or incomplete information.

Question 17

The "law of diminishing marginal returns" applies to:
A)the short run, but not the long run.
B)the long run, but not the short run.
C)both the short run and the long run.
D)neither the short run nor the long run.

Accepted Answer

The "law of diminishing marginal returns" primarily applies to the short run because it is during this period that at least one factor of production is fixed, leading to decreased additional output from each additional unit of variable input. In the long run, all factors of production can be varied, so the concept doesn't directly apply.

Question 18

From the manager's perspective:
A)it is important to treat implicit costs as explicit in order to make sound strategic decisions.
B)implicit costs are simply a theoretical construct and should be ignored in the decision-making process.
C)only explicit costs matter because accounting profit is based on explicit costs.
D)there is no difference between implicit and explicit costs. As such, treating implicit costs as explicit would result in double counting and an overstatement of total costs.

Accepted Answer

From the manager's perspective, it is important to treat implicit costs as explicit in order to make sound strategic decisions. Implicit costs are often overlooked but can have a significant impact on the decision-making process. By making implicit costs explicit, managers can have a more accurate understanding of the true cost of a decision and make informed decisions.

Question 19

Data on productivity gains in the 1990s in the United States strongly suggest that a significant share of those gains was attributable to:
A)improvements in education and training.
B)improvements in information technology.
C)substantial reductions in labor costs.
D)increased demand for goods and services.

Accepted Answer

The data suggests that a significant share of productivity gains in the 1990s in the United States were attributable to improvements in information technology, such as increased computer usage and better software.

Question 20

All else constant,as the amount of a firm's implicit costs increases,the difference between economic profit and accounting profit will:
A)increase.
B)stay the same.
C)decrease.
D)cannot be determined without more information.

Accepted Answer

Implicit costs are not reflected in accounting profit but are included in economic profit. As the amount of a firm's implicit costs increases, economic profit will decline by a greater extent than accounting profit. Therefore, the difference between economic profit and accounting profit will increase.

Quiz 5: Production and Cost Analysis in the Short Run

The payment of wages by a firm is an example of:

Economic profit is equal to the difference between:

Which of the following is not a determinant of a firm's cost functions?

Which of the following statements regarding historical costs is correct?

Which of the following is the best example of "depreciation"?

Marginal product equals 0 when:

Which of the following is true of the typical relationship between marginal product (MP) and average product (AP) ?

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

All else constant,an increase in productivity has the effect of causing:

Which of the following statements is false?

Suppose a sole proprietorship is earning total revenues of $100,000 and is incurring explicit costs of $75,000.If the owner could work for another company for $30,000 a year,we would conclude that:

The amount of money a firm pays to lease a building it uses for office space is called:

Diminishing marginal returns occur when:

An implicit cost is defined as:

Which of the following statements is correct?

The "law of diminishing marginal returns" applies to:

From the manager's perspective:

Data on productivity gains in the 1990s in the United States strongly suggest that a significant share of those gains was attributable to:

All else constant,as the amount of a firm's implicit costs increases,the difference between economic profit and accounting profit will: