Deck 5: Costs and Production: How Do Businesses Work?

Question 1

Which of the following conditions will result in the firm making an economic profit?

A) P > AC
B) P < AC
C) P = AC
D) P = MC
E) AC > P > MC

Answer 1

P > AC

Question 2

Implicit costs are:

A) the opportunity cost of the means of production.
B) always paid out of pocket.
C) never greater than explicit costs.
D) always greater than explicit costs.
E) not measured in terms of dollars.

Answer 2

the opportunity cost of the means of production.

Question 3

Chuck Diesel Burger is a food truck in Houston,Texas.Imagine that Chuck Diesel Burger's minimum average of all costs (AC)is $3.75 and that its minimum average cost of variable inputs is $2.50.Chuck Diesel Burger will make a positive economic profit if the price is equal to:

A) $4.00.
B) $3.75.
C) $3.00.
D) $2.50.
E) $2.00.

Answer 3

$4.00.

Question 4

Explicit costs are:

A) the opportunity cost of the means of production.
B) always paid out of pocket.
C) always greater than implicit costs.
D) never greater than implicit costs.
E) what a business sacrifices in order to produce a good.

Question 5

The out-of-pocket expenses incurred in producing a good are also known as:

A) implicit costs.
B) fiduciary costs.
C) explicit costs.
D) capital costs.
E) wages and prices.

Question 6

Which of the following conditions will result in the firm making zero economic profit?

A) P > AC
B) P < AC
C) P = AC
D) P = MC
E) AC > P > MC

Question 7

Refer to the accompanying figure.If the price is $8,the firm is making:

A) a loss on any quantity greater than at the intersection of MC and AC.
B) a profit on any quantity greater than at the intersection of MC and AC
C) a loss on any quantity less than at the intersection of MC and AC.
D) a profit on any quantity less than at P = $8.
E) zero profit.

Question 8

Every year the U.S.sugar industry,which is dominated by only a few firms,spends millions of dollars lobbying members of Congress and contributing to their re-election campaigns.It does so for both Democrats and Republicans.One goal of these contributions is the preservation of the U.S.sugar quota,which limits the importation of less expensive sugar from other countries.Ultimately,all of these activities are motivated by a desire among U.S.sugar producers to:

A) keep their prices as low as possible.
B) make the market for sugar as competitive as possible.
C) support one political party but not another.
D) keep their profits as high as possible.
E) hire as many employees as they can.

Question 9

Refer to the accompanying figure.A firm would be making positive profits if the price is:

A) anywhere below $5.
B) below $5 but above $4.
C) anywhere above $4.
D) below $4.
E) above $5.

Question 10

A firm's decisions are ultimately oriented toward:

A) minimizing the number of employees it hires.
B) maximizing profit.
C) maximizing production.
D) increasing total revenue.
E) negotiating better deals with suppliers.

Question 11

Total revenue minus total cost is equal to:

A) producer surplus.
B) dividends.
C) consumer surplus.
D) profit.
E) retained earnings.

Question 12

When revenue is insufficient to cover cost,the firm:

A) will produce more.
B) will produce less, but more than nothing.
C) gains a profit.
D) breaks even.
E) suffers a loss.

Question 13

If a firm generates $240,000 in revenue,earns $120,000 in economic profit,and its explicit costs are $80,000,how much are its implicit costs?

A) $160,000
B) $80,000
C) $40,000
D) $60,000
E) $120,000

Question 14

An example of an implicit cost is:

A) a payment on the loan for a piece of equipment not in use.
B) a payment on an electricity bill.
C) wages paid to employees.
D) gasoline costs.
E) forgone wages.

Question 15

If a firm wants to cut its costs through more efficient production,we should assume that the firm is trying to:

A) fire its employees.
B) increase its profits.
C) eliminate its competition.
D) buy back its stock.
E) gain control over its market.

Question 16

Firms will break even if the price they charge is:

A) less than their minimum average of all costs (AC).
B) less than their minimum average cost of fixed inputs.
C) greater than their minimum average cost of variable inputs.
D) greater than their minimum average of all costs (AC).
E) equal to their minimum average of all costs (AC).

Question 17

Firms will always make a positive economic profit if the price they charge is:

A) less than their minimum average of all costs (AC).
B) less than their minimum average cost of fixed inputs.
C) greater than their minimum average cost of variable inputs.
D) greater than their minimum average of all costs (AC).
E) equal to their minimum average of all costs (AC).

Question 18

Chief executive officers (CEOs)of major corporations are often paid mostly with stock options (which allow the holder to buy stock at a given price),as opposed to salaries and cash payments.These stock options often cannot be converted into stock and sold until years after they were issued.All this is ultimately intended to create incentives for the CEO to:

A) leave the company after a year or so.
B) lay off as many employees as possible.
C) increase the value of the stock by maximizing company profit.
D) outsource all production to other countries.
E) lobby Congress for subsidies and tax breaks.

Question 19

In economics,we assume that firms make decisions in order to:

A) maximize profit.
B) minimize revenues.
C) evade taxes.
D) lobby officials.
E) protect the environment.

Question 20

If a firm has total costs of $535,000 and its implicit costs are $165,000,how much are its explicit costs?

A) $3,242
B) $120,000
C) $370,000
D) $700,000
E) $308

Question 21

Lauren is the owner of a bakery.Last year,her total revenue was $145,000,her rent was $12,000,her labor costs were $65,000,and her overhead expenses were $15,000.If she could earn $53,000 working for another bakery nearby,we know that her economic profit was:

A) $145,000.
B) $53,000.
C) $12,000.
D) $0.00.
E) $15,000.

Question 22

An example of an explicit cost is:

A) a payment on a loan for a computer.
B) the savings interest lost by investing $10,000 in capital instead of saving the money.
C) forgone wages.
D) the opportunity cost of a $50,000 investment into a building.
E) the amount of money one could receive for renting a company truck to another business.

Question 23

Economic profit is equal to:

A) total revenue minus explicit costs.
B) total revenue minus implicit costs.
C) explicit costs plus implicit costs.
D) total revenue minus implicit costs and explicit costs.
E) explicit costs minus implicit costs.

Question 24

Ralph owns a small pizza restaurant,where he works full-time in the kitchen.His total revenue last year was $100,000,and his rent was $3,000 per month.He pays his one employee $2,000 per month,and the cost of ingredients and overhead averages $500 per month.Ralph could earn $35,000 per year as the manager of a competing pizza restaurant nearby.His total economic profit for the year was:

A) $34,000.
B) -$1,000.
C) $20,000.
D) $65,000.
E) -$35,000.

Question 25

Implicit costs can be difficult to measure because:

A) business owners cannot always observe them directly.
B) they are not measured in dollars.
C) they are always very expensive.
D) they are always greater than explicit costs.
E) they include expenses like taxes.

Question 26

Which of the following is true about explicit costs?

A) They are the opportunity costs of production.
B) They are out-of-pocket expenses.
C) They are not measured in terms of dollars.
D) They are not included when measuring economic profit.
E) They are not included when measuring accounting profit.

Question 27

Ralph owns a small pizza restaurant,where he works full-time in the kitchen.His total revenue last year was $100,000,and his rent was $3,000 per month.He pays his one employee $2,000 per month,and the cost of ingredients and overhead averages $500 per month.Ralph could earn $35,000 per year as the manager of a competing pizza restaurant nearby.His total implicit costs for the year were:

A) $100,000.
B) $35,000.
C) $60,000.
D) $66,000.
E) $72,000.

Question 28

Consider the following scenario when answering the following two questions.
Charlie's Churros is a perfectly competitive firm that sells desserts in Houston, Texas. Charlie's Churros currently is taking in $40,000 in revenues and has $15,000 in explicit costs and $25,000 in implicit costs.
Charlie's Churros' economic profits are:

A) $40,000.
B) $15,000.
C) $25,000.
D) $0.
E) $80,000.

Question 29

Darrell is the owner of a furniture store.Last year,his total revenue was $525,000 and his total labor costs were $200,000.His overhead expenses,including insurance and legal fees,were $175,000.The rent on his building was $45,000.Darrell could earn $105,000 per year working at a nearby furniture distributor.If his total revenue increases to $600,000 this year and all of his other expenses are held constant,we know that his economic profit is now:

A) $75,000.
B) $600,000.
C) $0.00.
D) $105,000.
E) $200,000.

Question 30

Ralph owns a small pizza restaurant,where he works full-time in the kitchen.His total revenue last year was $100,000,and his rent was $3,000 per month.He pays his one employee $2,000 per month,and the cost of ingredients and overhead averages $500 per month.Ralph could earn $35,000 per year as the manager of a competing pizza restaurant nearby.His accountant,who does not consider implicit costs,would tell him that profit for the year was:

A) -$1,000.
B) $100,000.
C) $72,000.
D) $34,000.
E) $35,000.

Question 31

Lauren is the owner of a bakery that earns 0 (zero)economic profit.Last year,her total revenue was $145,000,her rent was $12,000,her labor costs were $65,000,and her overhead expenses were $15,000.From this information,we know that her total implicit costs were:

A) $145,000.
B) $53,000.
C) $92,000.
D) $65.000.
E) $15,000.

Question 32

Darrell is the owner of a furniture store.Last year,his total revenue was $525,000 and his total labor costs were $200,000.His overhead expenses,including insurance and legal fees,were $175,000.The rent on his building was $45,000.Darrell could earn $105,000 per year working at a nearby furniture distributor.From this information,we know that his accountant,who does not consider implicit costs,would tell him that profit was:

A) $525,000.
B) $375,000.
C) $150,000.
D) $175,000.
E) $105,000.

Question 33

Ralph owns a small pizza restaurant,where he works full-time in the kitchen.His total revenue last year was $100,000,and his rent was $3,000 per month.He pays his one employee $2,000 per month,and the cost of ingredients and overhead averages $500 per month.Ralph could earn $35,000 per year as the manager of a competing pizza restaurant nearby.His total explicit costs for the year were:

A) $24,000.
B) $6,000.
C) $60,000.
D) $66,000.
E) $72,000.

Question 34

An explicit cost for a business that manufactures bicycles would be the:

A) value of the products that the firm's employees could produce at another company.
B) salary that the owner of the business could earn elsewhere.
C) goods and services provided by the government with the taxes the firm pays.
D) wages paid to employees.
E) various products that could be made with the steel used to make bicycles.

Question 35

Economists consider both explicit and implicit costs when measuring economic profit.The reason they consider implicit costs is that:

A) they are more conservative than accountants, who consider only costs that are out-of-pocket.
B) most businesses forget to pay their implicit costs.
C) a business must cover its opportunity costs as well as its out-of-pocket expenses to be truly profitable.
D) implicit costs are typically far larger than explicit costs.
E) implicit costs include expenses like taxes and fees to the government.

Question 36

One difference between implicit costs and explicit costs is that:

A) implicit costs are included in the method accountants use to compute profits, whereas explicit costs are not.
B) implicit costs are included in economic profits, whereas explicit costs are not.
C) explicit costs are included in the method accountants use to compute profits, whereas implicit costs are not.
D) explicit costs are included in economic profits, whereas implicit costs are not.
E) explicit costs involve opportunity costs, whereas implicit costs involve a monetary transaction.

Question 37

Accountants consider only explicit costs when measuring profit,whereas economics consider both implicit and explicit costs.The reason that they ignore implicit costs is that:

A) implicit costs are typically very small.
B) explicit costs are always greater than implicit costs.
C) implicit costs are not out-of-pocket expenses.
D) implicit costs are tax deductible.
E) implicit costs cannot be measured in terms of dollars.

Question 38

Lauren is the owner of a bakery.Last year,her total revenue was $145,000,her rent was $12,000,her labor costs were $65,000,and her overhead expenses were $15,000.From this information,we know that her accountant,who does not consider implicit costs,would tell her that profit was:

A) $145,000.
B) $53,000.
C) $65,000.
D) $15,000.
E) $27,000.

Question 39

Consider the following scenario when answering the following two questions.
Charlie's Churros is a perfectly competitive firm that sells desserts in Houston, Texas. Charlie's Churros currently is taking in $40,000 in revenues and has $15,000 in explicit costs and $25,000 in implicit costs.
If Charlie's Churros' profits are computed by the method that accountants use,then they are:

A) $40,000.
B) $15,000.
C) $25,000.
D) $0.
E) $80,000.

Question 40

Lauren is the owner of a bakery that earns 0 (zero)economic profit.Last year,her total revenue was $145,000,her rent was $12,000,her labor costs were $65,000,and her overhead expenses were $15,000.From this information,we know that her total explicit costs were:

A) $80,000.
B) $92,000.
C) $15,000.
D) $77,000.
E) $53,000.

Question 41

Refer to the following graph to answer the questions that follow.

The firm is experiencing diminishing marginal product beyond what level of output along the marginal cost curve?

A) Q5
B) Q1
C) Q2
D) Q3
E) Q4

Question 42

Lauren owns a bakery that produces,among other things,wedding cakes.She currently has 7 employees; with 7 employees,her bakery can produce 12 wedding cakes per day.If she hired an eighth employee,her bakery would be able to produce 16 wedding cakes per day.Therefore,the marginal product of the eighth employee is ________ wedding cake(s).

A) 2
B) 1
C) 8
D) 16
E) 4

Question 43

The production function for automobiles includes:

A) farmland, seeds, rain, and tractors.
B) an aircraft carrier, planes, helicopters, sailors, and pilots.
C) a mall, racks and shelves, mannequins, and sales clerks.
D) lumber, shingles, windows, doors, and carpenters.
E) a factory, an assembly line, workers, and robots.

Question 44

If all workers are able to specialize and become more productive as more labor is hired,the amount of total output produced ________ at a(n)________ rate.

A) increases; decreasing
B) increases; constant
C) increases; increasing
D) decreases; increasing
E) decreases; constant

Question 45

The three primary tangible factors of production are:

A) revenue, profits, and costs.
B) price, quantity, and profits.
C) capital, interest, and savings.
D) labor, wages, and training.
E) land, labor, and capital.

Question 46

The three primary tangible inputs are:

A) revenue, profits, and costs.
B) price, quantity, and profits.
C) land, labor, and capital.
D) labor, wages, and training.
E) capital, interest, and savings.

Question 47

As a firm hires more labor and each worker is able to specialize,what happens to each additional worker's marginal productivity?

A) It increases at first, then decreases.
B) It increases continuously.
C) It decreases continuously.
D) It decreases at first, then increases.
E) It remains constant, no matter how much labor is hired.

Question 48

A firm's production function is similar to a recipe used to make a cake in the sense that the production function shows us the combination of ________ used to produce ________.

A) inputs; output
B) outputs; input
C) costs; profit
D) expenses; revenue
E) taxes; deductions

Question 49

The production function for bookshelves includes:

A) yeast, flour, pans, ovens, and bakers.
B) electric guitars, drums, microphones, musicians, and a stage.
C) foam cushions, fabric, wood, nails, and furniture makers.
D) wood, nails, carpenters, saws, and hammers.
E) wool fabric, buttons, a zipper, a sewing machine, and a tailor.

Question 50

Refer to the following graph to answer the questions that follow.

Based on the graph,at output Q₅ is this firm earning positive,negative,or zero economic profits?

A) We cannot determine the firm's level of profit because we do not know about its revenues.
B) It is earning positive economic profit.
C) Because this is the short run, all firms earn positive economic profit.
D) It is earning zero economic profit.
E) It is earning negative economic profit.

Question 51

A firm has a certain amount of capital and land.As it hires more labor,each worker is able to:

A) earn a higher wage.
B) specialize.
C) work more overtime.
D) purchase more capital.
E) purchase more land.

Question 52

Lauren owns a bakery that produces,among other things,wedding cakes.She currently has 5 employees; with 5 employees,her bakery can produce 7 wedding cakes per day.If she hired a sixth employee,her bakery would be able to produce 9 wedding cakes per day.Therefore,the marginal product of the sixth employee is ________ wedding cakes.

A) 5
B) 7
C) 9
D) 2
E) 1.5

Question 53

Lauren owns a bakery that produces,among other things,wedding cakes.She currently has 6 employees; with 6 employees,her bakery can produce 9 wedding cakes per day.If she hired a seventh employee,her bakery would be able to produce 12 wedding cakes per day.Therefore,the marginal product of the seventh employee is ________ wedding cakes.

A) 9
B) 7
C) 1.71
D) 3
E) 5

Question 54

Another term for factors of production is:

A) outputs.
B) inputs.
C) profits.
D) revenues.
E) costs.

Question 55

Marginal product is the change in:

A) total output divided by the change in input.
B) total output plus the change in input.
C) total output minus the change in input.
D) total output times the change in input.
E) input divided by the change in total output.

Question 56

If workers are unable to specialize and become more productive as more labor is hired,the amount of total output produced ________ at a(n)________ rate.

A) increases; increasing
B) increases; constant
C) increases; decreasing
D) decreases; increasing
E) decreases; constant

Question 57

The change in total output divided by the change in input is known as:

A) marginal product.
B) marginal cost.
C) specialization.
D) total product.
E) marginal profit.

Question 58

Refer to the following graph to answer the questions that follow.

The firm is experiencing gains from specialization up to what level of output along the marginal cost curve?

A) Q2
B) Q5
C) Q1
D) Q3
E) Q4

Question 59

The change in total cost given a change in output is also known as ________ cost.

A) differential
B) marginal
C) average
D) short-run
E) long-run

Question 60

A firm's inputs are also known as its:

A) outputs.
B) profits.
C) factors of production.
D) revenues.
E) costs.

Question 61

Assume that a firm hires an additional employee.If the marginal product for that employee is greater than for the previous employee hired,it must be because:

A) the marginal product of labor is diminishing.
B) all workers are paid the same wage.
C) the workers all perform the exact same set of tasks.
D) there are gains from specialization.
E) all workers are not paid the same wage.

Question 62

Steve owns a bike store.His total costs are $1.2 million per year.Last year,Steve sold 1,200 bikes.If Steve sells 1,250 bikes this year (50 more than last year)and his total cost increases to $1.28 million,we know that the:

A) marginal revenue of selling 1,250 bikes is now $1,000.
B) average return of selling bikes has decreased.
C) average cost of selling bikes is unchanged.
D) marginal cost of those 50 bikes is $80,000.
E) marginal cost of those 50 bikes is $1.28 million.

Question 63

When marginal revenue equals marginal cost:

A) profits are always equal to zero.
B) firms should increase production.
C) firms should decrease production.
D) firms should stop production.
E) firms are maximizing profits, so they should continue at that production level.

Question 64

If a firm experiences diminishing marginal product,its marginal cost ________ at a(n)________ rate.

A) increases; increasing
B) decreases; decreasing
C) increases; constant
D) decreases; constant
E) increases; decreasing

Question 65

In the accompanying table,diminishing marginal product begins after the ________ unit of output.

A) second
B) fourth
C) fifth
D) third
E) first

Question 66

In the accompanying table,diminishing marginal product begins after the ________ unit of input.

A) first
B) second
C) seventh
D) fourth
E) sixth

Question 67

Profit maximization occurs when:

A) a firm expands output until marginal revenue is exceeded by marginal cost.
B) a firm expands output until marginal revenue is equal to marginal cost.
C) the price in the market is equal to the firm's marginal revenue.
D) total costs equal total revenue.
E) a firm sets the price at a point above average cost.

Question 68

Kimberly owns a cupcake shop in Newport Beach,California.The market for cupcakes is very competitive.At Kimberly's current production level,her marginal cost is $25 and her marginal revenue is $29.To maximize profits,Kimberly should:

A) decrease production.
B) keep production the same.
C) increase the price.
D) decease the price.
E) increase production.

Question 69

Marginal revenue is the change in total:

A) cost when the firm produces additional units.
B) revenue when the firm spends more money.
C) revenue divided by the change in total cost.
D) revenue when the firm produces additional units.
E) cost divided by the change in total revenue.

Question 70

If a firm hires another worker and his or her marginal product of labor is 0 (zero),we know that the firm's total output is:

A) 0 (zero).
B) unchanged.
C) increasing.
D) decreasing.
E) equal to the marginal product of that worker.

Question 71

If a firm hires another worker and his or her marginal product of labor is positive,we know that the firm's total output is:

A) decreasing.
B) unchanged.
C) increasing.
D) 0 (zero).
E) equal to the marginal product of that worker.

Question 72

If the marginal product of labor for a firm decreases as more workers are hired,we know that:

A) all workers are paid the same wage.
B) the marginal cost of producing output is decreasing.
C) the gains from specialization are exhausted.
D) the marginal cost of producing output is constant.
E) there are still gains from specialization left to be exploited.

Question 73

When a firm hires another employee and,as a result,total output increases,this change in total output is also known as:

A) total output.
B) marginal employment.
C) marginal product.
D) labor contribution.
E) marginal benefit.

Question 74

If the marginal product is increasing,the marginal cost of output must be:

A) decreasing.
B) constant.
C) equal to average cost.
D) unchanged.
E) increasing.

Question 75

If a firm hires another worker and his or her marginal product of labor is negative,we know that the firm's total output is:

A) increasing.
B) decreasing.
C) equal to the marginal product of that worker.
D) unchanged.
E) 0 (zero).

Question 76

If there are gains from specialization in a workplace,hiring another employee means that the marginal product of labor will:

A) decrease.
B) remain the same.
C) increase.
D) be 0 (zero).
E) be negative.

Question 77

As a firm hires more workers,its marginal product of labor increases only if:

A) each worker does the same tasks as all others.
B) all workers are paid the same wage.
C) the firm produces commodities.
D) employees are assigned specialized tasks.
E) all workers are paid different wages.

Question 78

The production function of a restaurant includes items such as labor (i.e.,cooks,waiters,a manager),capital (i.e.,ovens,counters,tables,chairs,and a building),and land.In the short run,the owner of the restaurant will optimize production by employing a variable amount of ________ given a fixed amount of ________.

A) capital; labor and land
B) land; capital and labor
C) labor; capital and land
D) labor; capital and raw materials
E) land; labor and raw materials

Question 79

If a firm experiences productivity gains from employee specialization,its marginal cost ________ at a(n)________ rate.

A) increases; increasing
B) decreases; increasing
C) decreases; decreasing
D) decreases; constant
E) increases; decreasing

Question 80

In competitive industries such as the lawn-mowing business:

A) firms set the prices for their products with little concern for the consumer.
B) firms are considered to be price makers.
C) market forces prevent firms from charging a higher price.
D) the individual firms are much stronger than the market forces are.
E) the market forces set the quantity in the market but not the prices.