Deck 5: The Firm: Production and Cost  

Question 1

How are the profits of a corporation distributed?

A) In the form of dividends to stockholders
B) In the form of rebates to customers
C) In the form of bonuses to hourly employees
D) In the form of bonuses to managerial employees

Answer 1

In the form of dividends to stockholders

Question 2

How do corporations raise further capital?

A) By asking managers to contribute to an ownership fund
B) By asking employees to contribute to an ownership fund
C) By selling shares of common stock
D) By raising selling prices of their products

Answer 2

By selling shares of common stock

Question 3

The time frame in which all factors of production can vary is

A) the short run.
B) the fiscal year.
C) the long run.
D) the length of time for which a sole proprietorship is protected with limited liability.

Answer 3

the long run.

Question 4

Which one of the following is TRUE?

A) S type corporations are not protected by limited liability.
B) Profits earned by partnerships are subject to double taxation.
C) Profits earned by corporations are subject to double taxation.
D) Sole proprietorships enjoy the protection of limited liability.

Question 5

Which of the following is NOT a legal entitlement of stockholders in a corporation?

A) The right to vote on major policy decisions in the company
B) The right to vote on the company's Board of Directors
C) The right to receive distributed profits in the form of dividends
D) The right to receive discounts on company products

Question 6

The goal of the business firm is to

A) employ as many workers as possible.
B) pay as much in taxes as possible.
C) produce a unique product.
D) earn a profit.

Question 7

The letters LLC at the end of a company name stand for

A) lend-lease contract.
B) limited liability company.
C) legally-limited corporation.
D) limited labor corporation.

Question 8

Which form of business organization guarantees that the firm will make a profit?

A) Sole proprietorship
B) Partnership
C) Corporation
D) None of the above

Question 9

Which factors account for the popularity of LLC's?

A) Tax advantages along with limited liability
B) Exemption from minimum wage laws and exemption from state and local taxes
C) Limited liability and exemption from sales taxes
D) Exemption from sales taxes and guarantee of earning a profit

Question 10

The productivity of labor will determine

A) the shape of the production function.
B) whether a firm is a corporation or a partnership.
C) what percentage of profits will be taxed.
D) how long the long run is.

Question 11

A firm's marginal cost is not directly tied to

A) its total variable cost.
B) its average variable cost.
C) its marginal physical product.
D) its total fixed cost.

Question 12

Table 5.2


-In Table 5.2, the average product for 5 units of labor is

A) 20.0.
B) 22.5.
C) 25.0.
D) 15.0.

Question 13

Table 5.2


-In Table 5.2, the marginal product of the seventh worker is

A) 30.0
B) 25.0
C) 22.5
D) 10.0

Question 14

Any activity that results in the conversion of resources into products that can be used in consumption is

A) not profitable.
B) a start up venture.
C) demand.
D) production.

Question 15

The relationship between physical output and the quantity of capital and labor used in producing goods and services is called the

A) production function.
B) opportunity function.
C) input function.
D) linear demand function.

Question 16

When is the marginal physical product of labor negative?

A) When total output declines with the hiring of additional labor
B) When diminishing marginal returns set in
C) When marginal cost is negative
D) When marginal cost is declining

Question 17

The slope of the production function reflects the

A) marginal physical product.
B) average physical product.
C) cost of inputs.
D) selling price of the output.

Question 18

Which one of the following is TRUE?

A) There is no opportunity cost involved in generating electricity.
B) Hydroelectric power and nuclear power entail relatively high fixed costs.
C) Hydroelectric power and nuclear power entail relatively high variable costs.
D) Managers of electric utilities make all of their long-term decisions based on short-run costs.

Question 19

In the table below, what is the marginal cost of producing the first unit?

A) $5
B) $3
C) $2
D) $1

Question 20

In the table below, what is the marginal cost of producing the fifth unit?

A) $5
B) $3
C) $2
D) $1

Question 21

Costs that do not vary as output varies are

A) total variable costs.
B) total fixed costs.
C) total implicit costs.
D) total explicit costs.

Question 22

Which one of the following is TRUE?

A) Managers who make decisions on the margin are ignoring the long-run perspective.
B) The short run is the period of time in which the selling price of the product does not vary.
C) In the long run, all costs are marginal costs.
D) Average fixed cost equals the sum of average total cost and average variable cost.

Question 23

Table 5.5


-Using Table 5.5, we see that when output is 4 units, average total cost equals

A) 24.
B) 14.
C) 10.
D) 6.

Question 24

Table 5.5


-In Table 5.5, total fixed costs are

A) 10.
B) 8.
C) 5.
D) 0.

Question 25

Table 5.5


-In Table 5.5, when output is 8 units, average variable costs are

A) 4.75.
B) 3.50.
C) 1.25.
D) 4.50.

Question 26

Table 5.5


-In Table 5.5, the marginal cost of the ninth unit is

A) 4.
B) 5.
C) 6.
D) 7.

Question 27

Table 5.5


-In Table 5.5, the average total cost at nine units is

A) 7.0.
B) 4.9.
C) 3.1.
D) 1.0.

Question 28

Table 5.5


-In Table 5.5, the marginal cost of the third unit is

A) 4.
B) 3.
C) 2.
D) 1.

Question 29

Table 5.5


-In Table 5.5, the marginal cost of the tenth unit is

A) 4.
B) 5.
C) 6.
D) 7.

Question 30

Costs which do not vary with the amount a business produces are referred to as

A) fixed costs.
B) variable costs.
C) total costs.
D) opportunity costs.

Question 31

Total costs divided by the quantity of production is referred to as

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

Question 32

When does marginal cost begin to increase?

A) When total cost begins to increase
B) When total cost begins to decrease
C) When marginal physical product starts to decline
D) When opportunity cost starts to decline

Question 33

Average total cost is equal to

A) the sum of average variable cost and total variable cost.
B) the sum of average fixed cost and total fixed cost.
C) the sum of average fixed cost and average variable cost.
D) the difference between average fixed cost and average variable cost.

Question 34

Table 5.6


-Refer to Table 5.6. What is the average total cost of producing two units?

A) 7
B) 16
C) 45
D) 61

Question 35

Table 5.6


-Refer to Table 5.6. What is the marginal cost of producing the third unit?

A) 10
B) 25
C) 90
D) 115

Question 36

Table 5.6


-Refer to Table 5.6. What is the marginal cost of producing the fourth unit?

A) 10
B) 22
C) 25
D) 154

Question 37

Table 5.6


-Refer to Table 5.6. What is the average total cost of producing five units?

A) 185
B) 180
C) 37
D) 31

Question 38

Which one of the following is TRUE?

A) Total cost does not depend on the level of output.
B) Total fixed cost does not depend on the level of output.
C) Variable cost does not depend on the level of output.
D) Marginal cost does not depend on the level of output.

Question 39

Which one of the following is TRUE?

A) Marginal cost increases as marginal physical product decreases.
B) Marginal cost decreases as marginal product decreases.
C) Total cost is the sum of marginal cost plus total variable cost.
D) Total cost is the difference between marginal cost and total variable cost.

Question 40

-Refer to Table 5.7. What is the firm's total fixed cost?

A) 10
B) 20
C) 30
D) 40

Question 41

-Refer to Table 5.7. What is the total cost of producing three units?

A) 120
B) 90
C) 50
D) 40

Question 42

-Refer to Table 5.7. What is the total variable cost of producing three units?

A) 40
B) 50
C) 80
D) 120

Question 43

-Refer to Table 5.7. What is the average total cost of producing one unit?

A) 40
B) 50
C) 80
D) 120

Question 44

-Refer to Table 5.7. What is the average variable cost of producing one unit?

A) 10
B) 40
C) 50
D) 80

Question 45

-Refer to Table 5.7. What is the marginal cost of producing the second unit?

A) 40
B) 50
C) 90
D) Not enough information provided.

Question 46

-Refer to Table 5.7. What is the marginal cost of producing the third unit?

A) 50
B) 40
C) 30
D) 20

Question 47

-Refer to Table 5.7. What is true as the firm expands output from two units to three units?

A) Diminishing returns are observed.
B) Average total cost increases.
C) Average total cost decreases.
D) Marginal cost remains constant.

Question 48

-Refer to Table 5.7. What is the average variable cost of producing two units?

A) 50
B) 25
C) 10
D) Not enough information is provided.

Question 49

An accountant shows an invoice for raw materials to the manager of the firm. They
Are discussing

A) explicit costs.
B) implicit costs.
C) economic profits.
D) the slope of the production function.

Question 50

When would a firm's accounting profit differ from its economic profit?

A) When the firm has fixed costs
B) When the firm's marginal cost is increasing
C) When the firm's total explicit costs differ from the opportunity cost of all inputs used
D) When the firm's total revenue does not cover its fixed costs

Question 51

Short-run cost relationships for a firm are

A) not affected by the productivity of labor.
B) determined by the law of diminishing marginal returns.
C) such that the firm can always lower its average total cost by producing more.
D) such that the firm can always lower its average variable cost by producing more.

Question 52

The long-run is

A) the time period in which new workers can be hired.
B) the time period in which new workers can be trained.
C) the time period in which the firm is guaranteed to earn a profit.
D) the time period in which all factors of production can be varied.

Question 53

What is on the horizontal axis when we graph a marginal cost curve?

A) Quantity produced
B) Number of workers
C) Marginal product
D) Marginal cost

Question 54

What is on the horizontal axis when we graph an average total cost curve?

A) Quantity produced
B) Number of workers
C) Marginal product
D) Average total cost

Question 55

The law of diminishing returns explains

A) the behavior of consumers.
B) the behavior of managers.
C) the behavior of workers.
D) the behavior of costs.

Question 56

The law of diminishing returns

A) holds both in the short run and the long run.
B) does not hold in the short run because of fixed costs.
C) does not hold in the long run because there are no fixed inputs in the long run.
D) does not apply to goods produced by hand.

Question 57

In a traditional cost structure, marginal cost

A) is constant.
B) is U-shaped.
C) first rises, then falls.
D) is exactly equal to average total cost.

Question 58

Which one of the following would NOT change a firm's marginal cost structure?

A) A change in the wage rate paid to hourly workers.
B) A change in the productivity of each worker.
C) A change in the firm's total fixed cost.
D) A change in the cost of raw materials used to manufacture the product.

Question 59

If a firm can produce 100 fishing rods at a total cost of $6000 and can produce 150 fishing rods for a total cost of $8000, then the marginal cost of a fishing rod in the quantity range between 100 and 150 is

A) $80.
B) $60.
C) $53.
D) $40.

Question 60

If a firm can produce 1000 bottles of strawberry essence shampoo at a total cost of $420 and can produce 2000 bottles of strawberry essence shampoo for a total cost of $580, then the marginal cost of a bottle of shampoo in the quantity range between 1000 and 2000 is

A) $0.06.
B) $0.16.
C) $0.42.
D) $0.58.

Question 61

If a potter can create 10 vases at a total cost $180 and can produce 30 vases for a total cost of $400, then the marginal cost of a vase in the quantity range between 10 and 30 is

A) $11.
B) $13.
C) $18.
D) $40.

Question 62

Which one of the following would affect a firm's fixed costs?

A) A change in the wage rate
B) A change in the cost of raw material inputs
C) A change in the cost of packaging each unit of output
D) A change in the licensing fee that must be paid to operate as a legal business

Question 63

Which firms will have the easiest time obtaining additional financing?

A) Those that have low costs
B) Those that have high and steady profits
C) Those that are organized as sole proprietorships
D) Those that are organized as partnerships

Question 64

Economic theory expects that firms which survive in the marketplace

A) have cheated their competitors.
B) have cheated their customers.
C) have focused on the goal of maximizing profits.
D) have focused on the goal of treating their employees well.

Question 65

The largest stock exchange in the U.S. is the

A) NYSE.
B) NASDAQ.
C) FTSE.
D) S & P 500.

Question 66

The second largest stock exchange in the U.S. is the

A) NYSE.
B) NASDAQ.
C) FTSE.
D) S & P 500.

Question 67

The net change reported for each stock in the daily newspaper is

A) the number of people who bought that stock.
B) the number of people who sold that stock.
C) the difference between the highest price of the day and the lowest price of the day.
D) the difference between today's closing price and yesterday's closing price.

Question 68

The yield reported for a stock in the daily newspaper is

A) its annual dividend divided by its closing price.
B) its earnings per share divided by its closing price.
C) the increase in the day's stock price divided by the opening price.
D) the increase in the day's stock price divided by the closing price.

Question 69

A firm that earns an accounting profit above the normal rate of return

A) will not be able to stay in business.
B) is earning a negative economic profit.
C) is earning a positive economic profit.
D) is not covering all of the opportunity costs it incurs.

Question 70

Financial investors prefer to invest their funds in firms that

A) have high levels of fixed cost and low levels of variable cost.
B) have high levels of variable cost and low levels of fixed cost.
C) steadily earn a high profit.
D) can charge prices above the equilibrium price.

Question 71

A firm that focuses on earning a profit will be concerned with

A) choosing the output level that minimizes total cost.
B) maximizing the difference between revenues and costs.
C) converting its U-shaped marginal cost curve into a vertical line.
D) converting its U-shaped marginal cost curve into a horizontal line.

Question 72

In earning a profit, a firm

A) must underpay its employees.
B) must overcharge its customers.
C) will attract financial investors.
D) escapes the law of diminishing marginal returns.

Question 73

The primary disadvantage of the sole proprietorship and the partnership as forms of business organization is that the business owner is exposed to _________ _________.

Question 74

In a corporation, profits are distributed to shareholders in the form of _________.

Question 75

The income of _________ is subject to double taxation.

Question 76

A limited liability company (LLC) enjoys the _________ advantages of a partnership.

Question 77

The goal of a business firm is to _________ _________.

Question 78

A firm's _________ _________ shows the relationship between the amount of labor input used and the amount of output.

Question 79

The slope of the production function shows the _________ _________ _________ of labor.

Question 80

Average physical product is equal to total output divided by the number of _________.