Question 1

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 labor input increases. This will lead to an increase in both the marginal product of labor (the increase in output associated with hiring one additional unit of labor) and the average product of labor (the total output divided by the number of units of labor employed). Therefore, both the marginal and average product of labor will increase.

Question 2

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 3

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

An implicit cost is an opportunity cost of using resources that belong to the firm such as retained earnings that could have been used for other purposes such as investments, expansion, or payment of dividends.

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

Using historical costs to calculate profit can cause a discrepancy between accounting profit and economic profit. Historical costs do not account for changes in market prices or the opportunity cost of capital over time, which can lead to under or overstated 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 decrease in value of an asset over time due to wear and tear or obsolescence. A truck used by a pizzeria to make deliveries is an example of an asset that depreciates in value over time.

Question 6

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

In order to determine economic profit, we need to subtract both explicit and implicit costs from total revenue. Since the owner of the sole proprietorship could work for another company and earn $30,000, this is an implicit cost that needs to be subtracted from the total revenue. Therefore, Economic profit = Total revenue - Explicit costs - Implicit costs = $100,000 - $75,000 - $30,000 = -$5,000. This means that the firm is incurring an economic loss.

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 the point where AP is at its maximum. This is because when MP is greater than AP, AP is increasing, and when MP is less than AP, AP is decreasing. Therefore, the highest point of the AP curve occurs when MP is equal to AP.

Question 8

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 states that as a firm adds more units of a variable input (such as labor) to a fixed input (such as capital), the marginal product of the variable input eventually decreases. This principle applies in the short run because firms are working with at least one fixed input, but in the long run, all inputs are variable, so the principle does not necessarily hold.

Question 9

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 question is asking for the main factor that contributed to productivity gains in the 1990s in the United States, and the data suggests that it was largely due to improvements in information technology. This is supported by evidence such as the widespread adoption of personal computers and the internet during this decade, which allowed for more efficient communication and data processing in businesses. While improvements in education and training may have played a role, they are not likely to be the main factor behind such significant productivity gains. Substantial reductions in labor costs might have helped some companies, but it is unlikely to be the main contributor overall. Increased demand for goods and services is a result of increased productivity, rather than the cause of it.

Question 10

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 an alternative foregone, such as the potential revenue or profit from using that resource in another way. For example, if a business owner uses their own car to make deliveries for their business, the implicit cost of the car would be the potential earnings they could have made if they had used it for personal use or rented it out instead.

Question 11

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 paid by a firm to lease a building for office space is a tangible and measurable cost that the firm explicitly pays. Therefore, it is an explicit cost for the firm.

Question 12

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. The economic profit calculation includes both explicit and implicit costs, which are the opportunity costs of using the firm's resources.

Question 13

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 14

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 both explicit and implicit costs, which include the opportunity cost of all resources used in production. Therefore, economic profit is equal to total revenue minus the full opportunity cost of all resources used in production, option A.

Question 15

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 a variable input, such as labor or capital, is added to a fixed input, such as land or machinery, and the marginal product (the additional output resulting from the addition of one more unit of the variable input) of that input declines. This happens because eventually the fixed input becomes a constraint and prevents the variable input from being used as effectively as before, leading to a decrease in output per unit of the variable input. Therefore, choice B is the correct answer.

Question 16

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 accounted for in accounting profit, but they are considered in economic profit. As the amount of implicit costs increases, economic profit will decrease more than accounting profit, thus increasing the difference between the two.

Question 17

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 a firm's cost functions. The determinants of a firm's cost functions include the production function, the price of labor, and the productivity of the firm's capital stock, as these all affect the costs of production. The price of the firm's output, on the other hand, is a result of the firm's costs and the market demand for the product.

Question 18

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 an out-of-pocket expense and an explicit cost of production that can be easily accounted for and deducted from revenue when calculating profits. Implicit costs, on the other hand, refer to opportunity costs and are not reflected in accounting statements. Irreversible costs are costs that cannot be recovered, and payment of wages is a recurring expense that can be adjusted in the future. Payment of wages is also a short-run cost of production, as it can be adjusted in the short term.

Question 19

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 primarily the result of changes in management focusing on inventory systems and plant layout is supported by research and literature on the topic. The other statements are either unsupported or incorrect.

Question 20

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 include the opportunity cost of resources used in the production process, such as the value of the owner's time and the return that could have been earned in alternative investments. Ignoring these costs can lead to incorrect decisions and undervaluation of the true cost of production. By treating implicit costs as explicit, managers can better understand the true cost of production and make more informed decisions.

Quiz 5: Production and Cost Analysis in the Short Run

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

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

Which of the following statements regarding historical costs is correct?

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

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:

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

The "law of diminishing marginal returns" applies to:

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

An implicit cost is defined as:

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

Which of the following statements is false?

Marginal product equals 0 when:

Economic profit is equal to the difference between:

Diminishing marginal returns occur when:

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

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

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

Which of the following statements is correct?

From the manager's perspective: