Question 1

Payments to nonowners of a firm are called:

Accepted Answer

A)  implicit costs. 
B)  accounting costs. 
C)  explicit costs. 
D)  economic costs. 
A)  implicit costs. 
B)  accounting costs. 
C)  explicit costs. 
D)  economic costs.

Question 2

Fixed costs are best defined as:

Accepted Answer

A)  costs that do not vary with output. 
B)  costs that are at a minimum when output approaches the firm's capacity. 
C)  the amount that one more unit of output adds to total costs. 
D)  costs that decline as output increases. 
A)  costs that do not vary with output. 
B)  costs that are at a minimum when output approaches the firm's capacity. 
C)  the amount that one more unit of output adds to total costs. 
D)  costs that decline as output increases.

Question 3

What is the difference between economic and accounting profit? Why is a distinction between them important?

Accepted Answer

An economic profit includes implicit cos

Question 4

In the long run, a firm might experience rising per-unit cost due to:

Accepted Answer

A)  economies of scale. 
B)  diseconomies of scale. 
C)  the law of supply. 
D)  the law of diminishing marginal returns. 
A)  economies of scale. 
B)  diseconomies of scale. 
C)  the law of supply. 
D)  the law of diminishing marginal returns.

Question 5

Which of the following best describes the law of diminishing returns?

Accepted Answer

A)  The principle that beyond some point the marginal product decreases as additional units of a variable factor (ex: labor) are added to a fixed factor (ex: a restaurant kitchen). 
B)  The concept that as a person consumes more and more of a good, such as pizza slices, that the marginal utility from each additional slice will decline. 
C)  The empirical fact that the profitability of firms declines in the long run due to increasing competition. 
D)  None of the above. 
A)  The principle that beyond some point the marginal product decreases as additional units of a variable factor (ex: labor) are added to a fixed factor (ex: a restaurant kitchen). 
B)  The concept that as a person consumes more and more of a good, such as pizza slices, that the marginal utility from each additional slice will decline. 
C)  The empirical fact that the profitability of firms declines in the long run due to increasing competition. 
D)  None of the above.

Question 6

Economic profit equals accounting profit minus implicit costs.

Accepted Answer

A) True 
 B)False

Question 7

The long run is a period of:

Accepted Answer

A)  at least one year. 
B)  sufficient length to allow a firm to expand output by hiring additional workers. 
C)  sufficient length to allow a firm to alter its plant size and capacity and all other factors of production. 
D)  sufficient length to allow a firm to transform economic losses into economic profits by hiring better workers. 
A)  at least one year. 
B)  sufficient length to allow a firm to expand output by hiring additional workers. 
C)  sufficient length to allow a firm to alter its plant size and capacity and all other factors of production. 
D)  sufficient length to allow a firm to transform economic losses into economic profits by hiring better workers.

Question 8

A farm is able to produce 9,000 pints of strawberries per season on 10 acres. It adds one more acre and is able to produce 12,000 pints per season. The marginal product of land for this farm is:

Accepted Answer

A)  900 pints per acre per year. 
B)  1,000 pints per acre per year. 
C)  3,000 pints per acre per year. 
D)  12,000 pints per acre per year. 
A)  900 pints per acre per year. 
B)  1,000 pints per acre per year. 
C)  3,000 pints per acre per year. 
D)  12,000 pints per acre per year.

Question 9

For most firms, the costs of energy and raw materials will be total fixed costs.

Accepted Answer

A) True 
 B)False

Question 10

A firm's opportunity cost of using resources provided by the firm's owners is called:

Accepted Answer

A)  sunk costs. 
B)  fixed costs. 
C)  explicit costs. 
D)  implicit costs. 
E)  entrepreneurial costs. 
A)  sunk costs. 
B)  fixed costs. 
C)  explicit costs. 
D)  implicit costs. 
E)  entrepreneurial costs.

Question 11

Exhibit 6-15  Long-run average cost   In Exhibit 6-15, short-run average total cost, short-run marginal cost, and long-run average cost are all equal at which level of output per week?

Accepted Answer

A)  500 units. 
B)  1,000 units. 
C)  1,500 units. 
D)  2,000 units. 
A)  500 units. 
B)  1,000 units. 
C)  1,500 units. 
D)  2,000 units.

Question 12

Suppose a firm has total revenue of $200 million, explicit costs of $190 million, and implicit costs of $20 million. This firm's accounting profit is:

Accepted Answer

A)  $80 million. 
B)  $70 million. 
C)  $10 million. 
D)  -$10 million. 
A)  $80 million. 
B)  $70 million. 
C)  $10 million. 
D)  -$10 million.

Question 13

If a firm's average variable cost curve is rising, its marginal cost must exceed its average variable cost.

Accepted Answer

A) True 
 B)False

Question 14

Suppose a firm earns an accounting profit. This means the firm also earns a positive economic profit.

Accepted Answer

A) True 
 B)False

Question 15

Each short-run average total cost curve is tangent at its lowest point to the long-run average cost curve.

Accepted Answer

A) True 
 B)False

Question 16

Suppose there is a technology to produce Grendels such that there are diseconomies of scale after the first unit is produced. There are both fixed (a physical plant called a lair) and variable (food that grows in lairs) costs of production. Which statement is true ?

Accepted Answer

A)  b and d. 
B)  Producing multiple units increases the average fixed cost. 
C)  There will be no more than one firm in this industry. 
D)  It is cheaper to make five Grendels by buying five lairs and producing one Grendel in each lair than it is to produce five Grendels in one lair. 
E)  This is an impossible situation. 
A)  b and d. 
B)  Producing multiple units increases the average fixed cost. 
C)  There will be no more than one firm in this industry. 
D)  It is cheaper to make five Grendels by buying five lairs and producing one Grendel in each lair than it is to produce five Grendels in one lair. 
E)  This is an impossible situation.

Question 17

Exhibit 6-15  Long-run average cost   Given the short-run average total cost curves in Exhibit 6-15, what level of output per week minimizes average total cost?

Accepted Answer

A)  500 units. 
B)  1,000 units. 
C)  1,500 units. 
D)  2,000 units. 
A)  500 units. 
B)  1,000 units. 
C)  1,500 units. 
D)  2,000 units.

Question 18

A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job, which pays $20,000 a year, and take over a store building that he owns and currently rents to his brother for $6,000 a year. His expenses at the sushi bar would be $50,000 for food and $2,000 for gas and electricity. What are his explicit costs?

Accepted Answer

A)  $26,000. 
B)  $66,000. 
C)  $78,000. 
D)  $52,000. 
E)  $72,000. 
A)  $26,000. 
B)  $66,000. 
C)  $78,000. 
D)  $52,000. 
E)  $72,000.

Question 19

If the units of variable input in a production process are 1, 2, 3, 4, and 5, and the corresponding total outputs are 30, 34, 37, 39, and 40, respectively. The marginal product of the fourth unit is:

Accepted Answer

A)  2. 
B)  1. 
C)  37. 
D)  39. 
A)  2. 
B)  1. 
C)  37. 
D)  39.

Question 20

Exhibit 6-4  A marginal product curve   As shown in Exhibit 6-4, which of the following conclusions can you draw about the firm's total output curve?

Accepted Answer

A)  It slopes downward throughout the range of 0-10 units of input. 
B)  It reaches a maximum at 5 units of output. 
C)  It has an inflection point at 5 units of input. 
D)  It has zero slope at 5 units of input. 
A)  It slopes downward throughout the range of 0-10 units of input. 
B)  It reaches a maximum at 5 units of output. 
C)  It has an inflection point at 5 units of input. 
D)  It has zero slope at 5 units of input.

Exam 6: Production Costs

Payments to nonowners of a firm are called:

Fixed costs are best defined as:

What is the difference between economic and accounting profit? Why is a distinction between them important?

In the long run, a firm might experience rising per-unit cost due to:

Which of the following best describes the law of diminishing returns?

Economic profit equals accounting profit minus implicit costs.

The long run is a period of:

A farm is able to produce 9,000 pints of strawberries per season on 10 acres. It adds one more acre and is able to produce 12,000 pints per season. The marginal product of land for this farm is:

For most firms, the costs of energy and raw materials will be total fixed costs.

A firm's opportunity cost of using resources provided by the firm's owners is called:

Exhibit 6-15 Long-run average cost In Exhibit 6-15, short-run average total cost, short-run marginal cost, and long-run average cost are all equal at which level of output per week?

Suppose a firm has total revenue of $200 million, explicit costs of $190 million, and implicit costs of $20 million. This firm's accounting profit is:

If a firm's average variable cost curve is rising, its marginal cost must exceed its average variable cost.

Suppose a firm earns an accounting profit. This means the firm also earns a positive economic profit.

Each short-run average total cost curve is tangent at its lowest point to the long-run average cost curve.

Suppose there is a technology to produce Grendels such that there are diseconomies of scale after the first unit is produced. There are both fixed (a physical plant called a lair) and variable (food that grows in lairs) costs of production. Which statement is true ?

Exhibit 6-15 Long-run average cost Given the short-run average total cost curves in Exhibit 6-15, what level of output per week minimizes average total cost?

If the units of variable input in a production process are 1, 2, 3, 4, and 5, and the corresponding total outputs are 30, 34, 37, 39, and 40, respectively. The marginal product of the fourth unit is:

Exhibit 6-4 A marginal product curve As shown in Exhibit 6-4, which of the following conclusions can you draw about the firm's total output curve?

Introducing the Economic Way of Thinking

Production Possibilities, Opportunity Cost, and Economic Growth

Market Demand and Supply

Markets in Action

Price Elasticity of Demand

Perfect Competition

Monopoly

Monopolistic Competition and Oligopoly

Labor Markets and Income Distribution

Gross Domestic Product

Business Cycles and Unemployment

Inflation

Aggregate Demand and Supply

Fiscal Policy

The Public Sector

Federal Deficits, Surpluses, and the National Debt

Money and the Federal Reserve System

Money Creation

Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model

International Trade and Finance

Economies in Transition

Growth and the Less-Developed Countries

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