Question 1

Use the figure to answer the following question(s).
Figure 8-4

According to Figure 8-4, at what output would a properly constructed marginal cost curve cross the ATC curve?

Accepted Answer

A)  2 
B)  3 
C)  4 
D)  5

Question 2

The law of diminishing returns indicates why

Accepted Answer

A)  beyond some point, the extra utility derived from additional units of a product will yield the consumer smaller and smaller amounts of additional satisfaction. 
B)  the firm's total fixed costs do not change with output in the short run. 
C)  a firm's long-run average total cost curve is U-shaped. 
D)  a firm's marginal costs will eventually increase as the firm expands output in the short run.

Question 3

A disadvantage of team production compared to contracting out is that

Accepted Answer

A)  transaction costs are often higher with team production. 
B)  the level of specialized knowledge required by team production is greater than with contracting out. 
C)  the problem of shirking must be more carefully addressed with team production. 
D)  team production increases the cost of production in most situations.

Question 4

The implicit rate of return that must be paid to induce investors to continue to supply the funds necessary to maintain a firm's capital assets is called

Accepted Answer

A)  the investors' rate of return. 
B)  the opportunity cost of labor. 
C)  the opportunity cost of capital. 
D)  equity capital.

Question 5

Use the figure to answer the following question(s).
Figure 8-2

Using Figure 8-2, calculate the firm's total cost of producing 20 units of output.

Accepted Answer

A)  $8 
B)  $120 
C)  $180 
D)  $240

Question 6

For a firm that wants to remain in business, which of the following costs could be avoided if it halted current production?

Accepted Answer

A)  fixed costs 
B)  variable costs 
C)  sunk costs 
D)  implicit costs

Question 7

Sally leaves her $34,000 secretarial position and invests her savings of $15,000 (on which she was earning 6 percent interest) to start her own agency. After expenses, her net income was $38,900. Her economic profit was

Accepted Answer

A)  $4,900. 
B)  $4,000. 
C)  $38,900. 
D)  zero. 
E)  − $10,100

Question 8

Use the figure to answer the following question(s).
Figure 8-3

According to Figure 8-3, at what output would a properly constructed marginal cost curve cross the ATC curve?

Accepted Answer

A)  3 
B)  4 
C)  5 
D)  6

Question 9

An activity known as shirking is least likely to occur when

Accepted Answer

A)  workers are not monitored. 
B)  all workers are paid the same wage rate. 
C)  the earnings of workers are closely tied to the worker's output. 
D)  the firm is organized as a corporation.

Question 10

Which of the following explains why business owners have a strong incentive to strive for operational efficiency?

Accepted Answer

A)  they recognize that operational efficiency promotes the public interest. 
B)  since the owners are residual income claimants, increased efficiency will mean a higher income for the owners. 
C)  if production is not conducted efficiently, the firm will ship jobs and capital out of the domestic market in order to be able to compete effectively. 
D)  Increased operational efficiency allows the firm to receive government tax breaks.

Question 11

In 1632, the Virginia Legislature decreed that all love apples must be sold for $1 per bushel (no more, no less). At the time, Mr. McKintoch had 1,000 bushels of love apples ready for harvesting. His sunk costs were $1,100, and his total costs (including sunk costs) would have been $1,800 if he harvested. If McKintoch decided not to harvest because he did not think he could cover his total costs, he

Accepted Answer

A)  made the wrong decision, but for the right reason. 
B)  made the wrong decision; the sunk cost component of total cost should not have affected his decision to harvest. 
C)  made the correct decision and considered the correct decision-making criteria; a firm should never sell for less than its costs. 
D)  One cannot determine from the data whether he should have harvested the love apples.

Exam 8: Costs and the Supply of Goods

Use the figure to answer the following question(s) . Figure 8-4 According to Figure 8-4, at what output would a properly constructed marginal cost curve cross the ATC curve?