Deck 8: The Business Cycle

Question 1

Greater-than-normal profit represents

A) Explicit costs minus implicit costs.
B) Payment for entrepreneurship.
C) Below-average returns to capital.
D) Exploitation of workers.

Answer 1

B

Question 2

Explicit costs

A) Include only payments to entrepreneurship.
B) Are the sum of actual monetary payments made for resources used to produce a good.
C) Include the market value of all resources used to produce a good.
D) Are the total opportunity costs of resources used to produce a good.

Answer 2

B

Question 3

All of the following are ways a business can earn economic profits except

A) Discover new products.
B) Maximize implicit costs but not explicit costs.
C) Take above-average risks.
D) Find new and better methods of production.

Answer 3

B

Question 4

A firm that makes zero economic profits

A) Must eventually go bankrupt and exit the industry.
B) Does not cover its variable costs and should shut down in the short run.
C) Incurs an accounting loss if fixed costs are greater than variable costs.
D) Covers all its costs, including a provision for normal profit.

Question 5

The accounting profit is equal to

A) $925.
B) $1,525.
C) $2,125.
D) $4,000.

Question 6

The best measure of the economic cost of doing your homework is

A) The most valuable opportunity you give up when you do your homework.
B) The amount you would have to pay to get someone else to do it.
C) The economic cost plus the accounting cost of doing the homework.
D) The tuition paid for your education plus the cost of any required textbooks.

Question 7

Implicit costs

A) Include only payments to workers and lenders.
B) Represent actual monetary payments made for resources used to produce a good such as oil.
C) Are the costs to produce a good or service for which no direct payment is made.
D) Are the total opportunity costs of resources and inputs used to produce a good.

Question 8

Which of the following is the best explanation for why individuals own small businesses?

A) Because they cannot earn a living working for corporate America.
B) To provide a product consumers want.
C) The expectation of profit.
D) To gain experience for their next job.

Question 9

Economic profit is

A) Greater than accounting profit by the amount of implicit cost.
B) Greater than accounting profit by the amount of explicit cost.
C) Less than accounting profit by the amount of implicit cost.
D) Less than accounting profit by the amount of explicit cost.

Question 10

Which of the following should not be included when calculating accounting profit?

A) The cost of taxes.
B) The return on inventory investment.
C) The cost of rent.
D) The cost of utilities.

Question 11

Suppose the entrepreneur could earn $1,000 as an employee elsewhere. This means the economic profit is

A) -$925.
B) -$75.
C) -$1,000.
D) $0.

Question 12

Economic profit is the difference between

A) Accounting profits and external costs.
B) Total costs and total economic costs.
C) Accounting profit and explicit costs.
D) Total revenues and total economic costs.

Question 13

Normal profit

A) Covers the full opportunity cost of the resources used by the firm.
B) Is an above-average rate of return.
C) Is the accounting profit earned when economic profits are greater than zero.
D) Is sufficient to induce entry into the industry.

Question 14

Suppose the entrepreneur could earn $1,000 as an employee elsewhere. This means the accounting profit is

A) $1,525.
B) $925.
C) -$75.
D) -$1,000.

Question 15

In defining economic costs, economists emphasize

A) Explicit and implicit costs while accountants recognize only implicit costs.
B) Explicit and implicit costs while accountants recognize only explicit costs.
C) Only explicit costs while accountants recognize only implicit costs.
D) Only explicit costs while accountants recognize explicit and implicit costs.

Question 16

The profit motive can encourage businesses to do all of the following except

A) Pollute the environment.
B) Restrict competition.
C) Provide unsafe working conditions.
D) Maximize social welfare.

Question 17

Normal profit implies that

A) Economic profit must be positive.
B) Economic profit must be negative.
C) The factors employed are earning as much as they could in the best alternative employment.
D) Firms will expand their scale of production.

Question 18

Economists assume the principal motivation of producers is

A) Psychological gratification.
B) Social status.
C) Profit.
D) Their preference for being "their own person."

Question 19

Profit

A) Is the difference between total revenue and total cost.
B) Is the difference between variable costs and fixed costs.
C) Is always a number greater than zero.
D) Must be reported to Wall Street quarterly.

Question 20

Accounting costs and economic costs differ because

A) Accounting costs exceed economic costs whenever any factor is not paid an explicit wage.
B) Accounting costs include implicit costs, and economic costs do not.
C) Economic costs include the opportunity costs of all resources used, while accounting costs include actual dollar outlays.
D) Accounting costs include explicit costs, and economic costs do not.

Question 21

In which of the following types of markets does a single firm have the most market power?

A) Perfect competition.
B) Monopolistic competition.
C) Oligopoly.
D) Monopoly.

Question 22

Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. To receive a normal profit, the firm described above would have to

A) Experience $10,000 less in cost.
B) Receive $90,000 more in revenue.
C) Receive $10,000 more in revenue.
D) Do nothing since it already earns a normal profit.

Question 23

The $600 paid in property taxes counts as

A) An implicit cost.
B) A normal cost.
C) A variable cost.
D) An explicit cost.

Question 24

Perfect competition is a situation in which

A) Every year, owners are likely to earn economic profits.
B) Every year, owners are likely to earn economic losses.
C) There are many firms and several buyers or sellers have market power.
D) There are many firms and no buyer or seller has market power.

Question 25

Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What is the accounting profit for the firm described above?

A) -$90,000.
B) $0.
C) $90,000.
D) $200,000.

Question 26

Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What are the annual economic costs for the firm described above?

A) $450,000.
B) $120,000.
C) $90,000.
D) $360,000.

Question 27

If a firm can change market prices by altering its output, then it

A) Has market power.
B) Faces a horizontal demand curve.
C) Is a price taker.
D) Is a competitive firm.

Question 28

Market structure is determined by the

A) Annual revenue, costs, and profits for an industry.
B) Number and relative size of the firms in an industry.
C) Amount of compensation given to the CEOs.
D) Price charged for the good or service produced.

Question 29

The perfectly competitive market structure includes all of the following except

A) Many firms.
B) Identical products.
C) Large advertising budgets.
D) Low entry barriers.

Question 30

Assuming the entrepreneur does not pay herself, the $1,000 she could earn as an employee elsewhere is considered

A) An implicit cost.
B) An explicit cost.
C) A fixed cost.
D) A variable cost.

Question 31

Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What are the annual explicit costs for the firm described above?

A) $450,000.
B) $160,000.
C) $90,000.
D) $360,000.

Question 32

Adam Weed is the owner/operator of a flower shop. Last year he earned $250,000 in total revenue. His explicit costs were $175,000 paid to his employees and suppliers (assume that this amount represents the total opportunity cost of these resources). During the year he received three offers to work for other flower shops with the highest offer being $75,000 per year. Which of the following is true about Adam's accounting and economic profit?

A) Accounting profit = $75,000; economic profit = $0.
B) Accounting profit = $175,000; economic profit = $75,000.
C) Accounting profit = $75,000; economic profit = negative $100,000.
D) Accounting profit = $0; economic profit = negative $75,000.

Question 33

A monopoly occurs when

A) There is only one producer of a good or service.
B) There is only one buyer of a good or service.
C) Owners take on additional risk and earn huge profits.
D) Companies become greedy and raise the price of a good or service.

Question 34

Lashondra is the owner/operator of an interior design firm. Last year she earned $400,000 in total revenue. Her explicit costs were $200,000 (assume that this amount represents the total opportunity cost of these resources). During the year she received offers to work for other design firms. One offer would have paid her $120,000 per year and the other would have paid her $130,000 per year. Lashondra's economic profit is equal to

A) -$50,000.
B) $70,000.
C) $0.
D) $200,000.

Question 35

Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What are the annual implicit costs for the firm described above?

A) $450,000.
B) $160,000.
C) $90,000.
D) $360,000.

Question 36

Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What is the economic profit for the firm described above?

A) -$90,000.
B) $0.
C) $90,000.
D) $200,000.

Question 37

Megan used to work at the local pizzeria for $15,000 per year but quit to start her own deli. To buy the necessary equipment, she withdrew $20,000 from her inheritance (which paid 8 percent interest). Last year she paid $25,000 for ingredients and $500 per month rent but had revenue of $50,000. She asked her dad the accountant and her mom the economist to calculate her profit for her.

A) Dad says she lost $11,000 and Mom says she lost $26,000.
B) Dad says her profit is $31,000 and Mom says her profit is $16,600.
C) Dad says her profit is $9,000 and Mom says she lost $6,000.
D) Dad says her profit is $9,000 and Mom says her profit is $2,400.

Question 38

Entrepreneurship

A) Always involves greater rewards than risks.
B) Can result in economic losses.
C) Cannot earn an economic profit.
D) Occurs in small businesses, but not large corporations.

Question 39

Suppose the entrepreneur could earn $800 as an employee elsewhere. This means the entrepreneur is earning

A) Breakeven profits.
B) Economic losses.
C) Economic profits.
D) Accounting losses.

Question 40

When a producer can control the market price for the good it sells, the producer

A) Is an entrepreneur.
B) Is certain to make a profit.
C) Has market power.
D) Is a perfectly competitive firm.

Question 41

If the equilibrium price in a perfectly competitive market for walnuts is $4.99 per pound, then an individual firm in this market can

A) Not sell additional walnuts unless the firm lowers its price.
B) Not sell additional walnuts at any price because the market is at equilibrium.
C) Sell an additional pound of walnuts at $4.99.
D) Sell more only by increasing its advertising budget.

Question 42

Which of the following industries is perfectly competitive?

A) Autos.
B) Cell phone service.
C) Wholesale fresh flowers.
D) Fast-food restaurants.

Question 43

The short run is the time period

A) Over which an investment decision can be made.
B) Necessary so that profits can be earned from production.
C) In which some costs are fixed.
D) In which only the amount of capital may be altered.

Question 44

A competitive firm

A) Has the market power to compete effectively.
B) Is large enough relative to the market to be taken into account by competitors.
C) Confronts a downward-sloping firm demand curve.
D) Is a price taker.

Question 45

The fact that a perfectly competitive firm's total revenue curve is an upward-sloping straight line implies that

A) The total profit curve is also an upward-sloping straight line.
B) Product price is constant at all levels of output.
C) Product price decreases as output increases, and demand is elastic.
D) Product price increases at all output levels.

Question 46

The demand curve for each perfectly competitive firm is

A) Downward-sloping.
B) Horizontal.
C) Vertical.
D) Upward-sloping.

Question 47

In making a production decision, an entrepreneur

A) Decides whether to enter or exit the market.
B) Decides what level of output will maximize profits.
C) Determines plants and equipment.
D) Can change both fixed and variable inputs.

Question 48

A firm maximizes total profit when

A) Total costs exceed total revenue by the largest amount.
B) Total revenues are maximized.
C) Marginal costs are greater than marginal revenues.
D) Total revenue exceeds total cost by the greatest amount.

Question 49

Fixed costs

A) Increase with the level of production in the short run.
B) Can be altered in the short run but not in the long run.
C) Increase as we move from the short run to the long run.
D) Are constant in the short run.

Question 50

The demand curve confronting a competitive firm is

A) Horizontal, as is market demand.
B) Horizontal, while market demand is downward-sloping.
C) Downward-sloping, while market demand is flat.
D) Downward-sloping, as is market demand.

Question 51

Which of the following is a production decision?

A) How much output the firm should produce in the long run.
B) Whether the firm should shut down or produce.
C) Whether the firm should exit or enter the market.
D) Whether the firm should merge with one of its rivals.

Question 52

A production decision involves choosing

A) The amount of plants and equipment and is a short-run decision.
B) The amount of plants and equipment and is a long-run decision.
C) A rate of output and is a short-run decision.
D) A rate of output and is a long-run decision.

Question 53

A perfectly competitive firm is a price taker because

A) The price of the product is determined by many buyers and sellers.
B) It has market power.
C) Market supply is upward-sloping.
D) Its products are differentiated.

Question 54

The market price for T-shirts sold in a perfectly competitive market is determined by

A) The largest firm in the industry.
B) Supply and demand.
C) Government regulation.
D) Strategic interaction.

Question 55

In order to sell additional units of their products, competitive firms must

A) Increase their advertising.
B) Lower their price.
C) Cut their expenses.
D) Increase output.

Question 56

If a perfectly competitive firm wanted to maximize its total revenues, it would produce

A) The output where MC equals price.
B) As much as it is capable of producing.
C) The output where the ATC curve is at a minimum.
D) The output where the marginal cost curve is at a minimum.

Question 57

Competitive firms cannot individually affect market price because

A) There is an infinite demand for their goods.
B) Demand is perfectly inelastic for their goods.
C) Their individual production is insignificant relative to the production of the industry.
D) The government exercises control over the market power of competitive firms.

Question 58

A firm's total revenue can be determined by

A) Price times quantity.
B) Profits minus costs.
C) Total costs minus variable costs.
D) Fixed costs minus quantity.

Question 59

The demand curve confronting a competitive firm

A) Equals the marginal revenue curve.
B) Is horizontal, as is the market demand curve.
C) Slopes downward, while the market demand curve is horizontal.
D) Slopes downward, and the marginal revenue curve is below it.

Question 60

Which of the following characterizes a competitive market?

A) A downward-sloping demand curve for the firm.
B) A vertical demand curve facing each firm in the market.
C) Some of the firms sell at a price above the market equilibrium price.
D) A downward-sloping demand curve for the market.

Question 61

The difference between the total revenue and total cost curves at a given output is equal to

A) Total profit.
B) Profit per unit.
C) Average revenue.
D) Average total cost.

Question 62

If price is less than marginal cost, a perfectly competitive firm should decrease output because

A) Marginal costs are increasing.
B) Total revenues are decreasing.
C) The firm is producing units that cost more to produce than the firm receives in revenue, thus reducing profits (or increasing losses).
D) Marginal revenue is decreasing.

Question 63

Refer to Figure 22.3 At quantity level B

A) The company is maximizing profit.
B) Marginal cost is greater than marginal revenue, so it should cut production.
C) The company is minimizing loss.
D) Marginal revenue is greater than marginal cost, so the firm should expand production.

Question 64

If diminishing returns exist, then

A) Each unit produced will cost incrementally less.
B) Each unit produced will cost incrementally more.
C) The total cost curve will be flat.
D) The total cost curve will be negatively sloped.

Question 65

A perfectly competitive firm should expand output when

A) P < ATC.
B) P > ATC.
C) P < MC.
D) P > MC.

Question 66

For the perfectly competitive firm, the marginal revenue is always

A) Increasing.
B) Constant.
C) Equal to average total cost.
D) Decreasing.

Question 67

If a perfectly competitive firm is producing a rate of output at which MC exceeds price, then the firm

A) Must have an economic loss.
B) Can increase its profit by increasing output.
C) Can increase its profit by decreasing output.
D) Is maximizing profit.

Question 68

When the short-run marginal cost curve is upward-sloping,

A) The average total cost curve is upward-sloping.
B) The average total cost curve is above the marginal cost curve.
C) Diminishing returns occurs with greater output.
D) There are diseconomies of scale.

Question 69

If price is greater than marginal cost, a perfectly competitive firm should increase output because

A) Marginal costs are increasing.
B) Additional units of output will add to the firm's profits (or reduce losses).
C) The price it receives for its product is increasing.
D) Total revenues would increase.

Question 70

Refer to the data in Figure 22.1. The profit-maximizing output for this firm is

A) 100 units.
B) Above 280 units.
C) 280 units.
D) 200 units.

Question 71

Profit per unit is equal to

A) TR - TC.
B) P - MR.
C) P - ATC.
D) TR - ATC.

Question 72

Which of the following represents the change in total cost that results from a one-unit increase in production?

A) Marginal profit.
B) Total revenue.
C) Marginal cost.
D) Marginal revenue.

Question 73

Short-run profits are maximized at the rate of output where

A) Average total costs are minimized.
B) Total revenue is maximized.
C) Marginal revenue is zero.
D) Marginal revenue is equal to marginal cost.

Question 74

Marginal revenue is the change in

A) Total revenue when output is changed.
B) Total revenue when price is changed.
C) Average revenue when output is changed.
D) Average revenue when price is changed.

Question 75

A perfectly competitive firm will maximize profits by choosing an output level where

A) Price is greater than marginal cost.
B) Price equals marginal cost.
C) Price equals total cost.
D) Price is greater than total cost.

Question 76

For perfectly competitive firms, price

A) Is greater than marginal revenue.
B) Is equal to marginal revenue.
C) Is less than marginal revenue.
D) And marginal revenue are not related.

Question 77

Refer to the data in Figure 22.1. The price of this good

A) Is $50 per unit.
B) Is $1 per unit.
C) Is $100 per unit.
D) Varies as output changes.

Question 78

Which of the following is generally a fixed cost?

A) Property taxes on land used in production.
B) Wages.
C) Profit taxes.
D) Utilities.

Question 79

Refer to the data in Figure 22.1. The shape of the total revenue curve indicates that the price of this good

A) Falls as output rises.
B) Rises as output rises.
C) Stays the same as output rises.
D) Falls at first as output rises, but then rises as output rises.

Question 80

Refer to the data in Figure 22.1. The total fixed costs for this firm are approximately

A) $50.
B) $100.
C) $600.
D) $200.