Question 1

A characteristic of the long run that is not available in the short run is that a firm is free to vary its output.

Accepted Answer

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Question 2

Bill owns "Bill's Home of Blues" a store that specializes in selling CDs and DVDs of blues musicians of the 1960s and 1970s. Bill took out a loan from his bank to pay for his store and its initial inventory. Bill pays the bank $900 per week for his loan. The $900 bank payment
A) is a long-run implicit cost.
B) is a fixed cost.
C) is a short-run implicit cost.
D) is a variable cost.

Accepted Answer

The $900 bank payment is a fixed cost as it does not change with the level of sales or production in the short run.

Question 3

In economics, what is the difference between the short run and the long run?

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Question 4

Which of the following statements is true?
A) Opportunity cost = explicit cost - implicit cost.
B) Total cost = fixed cost + implicit cost.
C) Total cost = fixed cost + variable cost.
D) Variable cost = wages + salaries + benefits.

Accepted Answer

Total cost is the sum of fixed cost and variable cost. This is because fixed cost remains the same regardless of the level of output while variable cost changes with the level of output. Implicit cost represents the opportunity cost of using resources that are owned by the firm while explicit cost is the actual monetary payment made for the resources used. Therefore, option A is incorrect. Option B is incorrect because it is the sum of fixed cost and implicit cost, which are different concepts. Option D is incorrect because it only lists certain components of variable cost and does not include all possible expenses that can be classified as variable cost.

Question 5

Average total cost is
A) total cost divided by the quantity of output produced.
B) total explicit costs divided by the quantity of output produced.
C) variable cost divided by the quantity of output produced.
D) the change in fixed plus variable cost divided by the quantity of output produced.

Accepted Answer

Average total cost is calculated by dividing the total cost (explicit and implicit) by the quantity of output produced. This gives the cost per unit of production, including all costs associated with production.

Question 6

If the firm is producing no output in the short run, then its total costs are zero.

Accepted Answer

Even if the firm is producing no output in the short run, it will still have to incur fixed costs such as rent, salaries of employees, and property taxes. Thus, its total costs cannot be zero.

Question 7

The rules of accounting generally require that ________ costs be used for purposes of keeping a company's financial records and for paying taxes. These costs are sometimes called ________ costs.
A) economic; legal
B) real; explicit
C) total; economic
D) explicit; accounting

Accepted Answer

The rules of accounting require the use of explicit costs for keeping financial records and paying taxes. Explicit costs are the out-of-pocket expenses incurred by a company, such as salaries, rent, and supplies. This is in contrast to economic costs, which include explicit costs as well as opportunity costs (the foregone opportunity of choosing an alternative action). While economic costs are important for decision-making purposes, they are not always required for accounting and tax purposes.

Question 8

The short run is the time period during which a firm has at least one input constraint.

Accepted Answer

In the short run, a firm is unable to adjust all of its inputs due to at least one input being fixed or having a limited ability to be adjusted in the current period. This input constraint differentiates the short run from the long run where a firm is able to adjust all inputs.

Question 9

The total cost schedule shows the relationship between different amounts of inputs and the resulting level of output.

Accepted Answer

The total cost schedule shows the relationship between different amounts of inputs and the resulting total cost, not the level of output.

Question 10

What is the difference between explicit costs and implicit costs? List three examples each of explicit costs and implicit costs that may be experienced by a small business.

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Question 11

What is the difference between between total costs, variable costs, and fixed costs?

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Question 12

The Santa Fe Spark Plug Company supplies spark plugs to automotive parts dealers. An increase in the demand for its product led Santa Fe to hire 150 new workers. Santa Fe also plans to expand the capacity of its plant but this project will take 2 years to complete. Which of the following statements is true?
A) The wages and benefits paid to the new workers are implicit costs.
B) The long run for Santa Fe is longer than 1 year.
C) The short run for Santa Fe is 1 year.
D) In the short run Santa Fe's variable costs increase, but its fixed costs decrease.

Accepted Answer

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Question 13

Consider a manufacturing operation that uses specialized machinery and labor to produce its output. In this case, the input that is not fixed in the short run is labor.

Accepted Answer

In the short run, the amount of machinery used in the manufacturing operation is typically fixed, while the amount of labor can be adjusted. Therefore, labor is the input that is not fixed in the short run.

Question 14

Economic costs include implicit costs but not explicit costs.

Accepted Answer

Economic costs include both explicit and implicit costs. Explicit costs are actual out-of-pocket expenses, while implicit costs are the opportunity costs of resources already owned by the firm or business owner.

Question 15

Stan owns a software design business. He obtained a bank loan to buy computer equipment for his business. He pays $1,000 per month for interest on the loan. He has 10 employees, each of whom is paid $4,000 per month. Because his business has been successful, next month he will increase employee wages to $5,000. If the revenue from his business remains at its current level, Stan is considering an addition to his office. Which of the following statements regarding Stan's business is false?
A) The payments Stan makes to his employees are variable costs and explicit costs.
B) The monthly payment Stan makes for his bank loan is an implicit cost.
C) The monthly payment Stan makes for his bank loan is a fixed cost.
D) The time and effort Stan spends on his software design business is an implicit cost.

Accepted Answer

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Question 16

Costs that change as output changes are called incremental costs.

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Question 17

In the long run, all of a firm's inputs are variable.

Accepted Answer

In the long run, a firm can adjust or change all of its inputs, making them all variable.

Question 18

Accounting costs exclude implicit costs.

Accepted Answer

Accounting costs only include the explicit costs, such as the direct expenses incurred in a business operation, and do not consider the implicit costs, such as opportunity costs or foregone benefits.

Question 19

In the short run, changes in output can only be brought about by a change in the quantity of variable inputs.

Accepted Answer

In the short run, fixed inputs cannot be changed, so any changes in output can only be achieved through changes in the quantity of variable inputs. Therefore, the statement is true.

Question 20

Stan owns a software design business. He does not have time to expand his office space or redesign the layout of his office. He can increase the amount of work he does by working more hours, asking his current employees to work more hours, or hiring more employees. The relationship between Stan's inputs and the maximum output his firm can produce is called his
A) long-run production function.
B) production possibilities frontier.
C) short-run production function.
D) cost function.

Accepted Answer

The relationship between Stan's inputs and the maximum output his firm can produce in the short-term is his short-run production function. Since Stan cannot expand his office space or redesign the layout of his office, he is limited by his current resources in the short-run. Therefore, he can only increase his output by working more hours, asking his current employees to work more hours, or hiring more employees. The long-run production function and production possibilities frontier would involve expanding his resources, which is not an option at this time. The cost function is not relevant to this scenario.

Quiz 11: Technology, Production, and Costs