ECONOMIC AND ACCOUNTANT PROFIT

1 118 A difference between explicit and implicit costs is that

a. explicit costs must be greater than implicit costs.

b. explicit costs do not require a direct monetary outlay by the firm, whereas implicit costs do.

c. implicit costs do not require a direct monetary outlay by the firm, whereas explicit costs do.

d. implicit costs must be greater than explicit costs.

2 170 Which of the following statements is correct?

a. Assuming that explicit costs are positive, economic profit is greater than accounting profit.

b. Assuming that implicit costs are positive, accounting profit is greater than economic profit.

c. Assuming that explicit costs are positive, accounting profit is equal to economic profit.

d. Assuming that implicit costs are positive, economic profit is positive.

Accounting profit = TR - EC
Economic profit = TR - EC - IC = Accounting profit - IC

3 172 A firm's opportunity costs of production are equal to its

a. explicit costs only.

b. implicit costs only.

c. explicit costs + implicit costs.

d. explicit costs + implicit costs + total revenue.

4 129 An example of an explicit cost of production would be the

a. cost of forgone labor earnings for an entrepreneur.

b. lost opportunity to invest in capital markets when the money is invested in one's business.

c. lease payments for the land on which a firm's factory stands.

d. value of the time the business could've spent producing something else.

4 142 Ryzard decides to open his own business and earns $60,000 in accounting profit the first year. When deciding to
open his own business, he withdrew $20,000 from his savings, which earned 6 percent interest. He also turned
down three separate job offers with annual salaries of $30,000, $40,000, and $45,000. What is Ryzard's economic
profit from running his own business?

a. $18,800

b. $58,800

c. $13,800

d. $28,800

112 Jane was a partner at a law firm earning $223,000 per year. She left the firm to open her own law practice. In the
first year of business she generated revenues of $347,000 and incurred explicit costs of $163,000. Jane's economic
profit from her first year in her own practice is

a. $39,000.

b. $124,000.

c. $163,000.

d. $184,000.

183 Bev is opening her own court-reporting business. She financed the business by withdrawing money from her
personal savings account. When she closed the account, the bank representative mentioned that she would have
earned $300 in interest next year. If Bev hadn't opened her own business, she would have earned a salary of
 $25,000. In her first year, Bev's revenues were $30,000, and she spent $1,000 on materials and supplies. Which of
the following statements is correct?

a. Bev's total explicit costs are $26,300.

b. Bev's total implicit costs are $300.

c. Bev's accounting profits exceed her economic profits by $300.

d. Bev's economic profit is $3,700.

MARGINAL PRODUCT

6 100 Table 13-2

Labor Output Marginal Product

(Number of workers) (Units) (Units)

0 0 –

1 300

2 500

3 600

4 650
rd
Refer to Table 13-2. What is the marginal product of the 3 worker?

a. 300 units

b. 200 units

c. 100 units

d. 50 units

5 104 Table 13-2

Labor Output Marginal Product

(Number of workers) (Units) (Units)

0 0 –

1 300

2 500

3 600

4 650

104. Refer to Table 13-2. At which number of workers does diminishing marginal product begin?

a. 1

b. 2

c. 3

d. 4

6 117 117. Suppose a certain firm is able to produce 125 units of output per day when 19 workers are hired. The firm is
able to produce 137 units of output per day when 20 workers are hired, holding other inputs fixed. The marginal
product of the 20th worker is

a. 6 units of output.

b. 7 units of output.

c. 12 units of output.
 d. 137 units of output.

PRODUCTION COSTS

7 99 99. Zaid's Tent Company has total fixed costs of $300,000 per year. The firm's average variable cost is $65 for
10,000 tents. At that level of output, the firm's average total costs equal

a. $65

b. $75

c. $85

d. $95

8 102 Table 13-8

Output Fixed Cost Variable Cost

(Units) (Dollars) (Dollars)

0 20 0

1 20 10

2 20 40

3 20 80

4 20 130

5 20 200

6 20 300

102. Refer to Table 13-8. What is the shape of the marginal cost curve for this firm?

a. constant

b. upward-sloping

c. downward-sloping

d. U-shaped

9 105
 105. Refer to Figure 13-2. Curve C is always declining because

a. of diminishing marginal product.

b. we are dividing fixed costs by higher and higher levels of output.

c. marginal product first increases, then decreases.

d. marginal product first decreases, then increases.

11 106
Table 13-7
The following table shows the production costs for The Flying Elvis Copter Rides.

Output Total Cost Fixed Cost Variable Cost

(Helicopter rides) (Dollars) (Dollars) (Dollars)

0 50 50 0

1 150 A B

2 G H I

3 M N O

106. Refer to Table 13-7. What is the value of A?

a. $25

b. $50

c. $100

d. $200

10 108 108. On a 250-acre farm, a farmer is able to produce 4,600 bushels of wheat when he hires 2 workers. He is able to
produce 6,400 bushels of wheat when he hires 3 workers. Which of the following possibilities is consistent with the
property of diminishing marginal product?

a. The farmer is able to produce 7,660 bushels of wheat when he hires 4 workers.

b. The farmer is able to produce 8,200 bushels of wheat when he hires 4 workers.

c. The farmer is able to produce 8,400 bushels of wheat when he hires 4 workers.

d. The farmer is able to produce 8,600 bushels of wheat when he hires 4 workers.

13 109 109. A firm produces 400 units of output at a total cost of $1,200. If total variable costs are $1,000,ATC=TC/Q

a. average fixed cost is 50 cents.

b. average variable cost is $2.

c. average total cost is $2.50.

d. average total cost is 50 cents.

114 114. The average fixed cost curve

a. always declines with increased levels of output.

b. always rises with increased levels of output.

c. declines as long as it is above marginal cost.

d. declines as long as it is below marginal cost.

15 125 125. For a large firm that produces and sells automobiles, which of the following costs would be a variable cost?
 a. The $20 million payment that the firm pays each year for accounting services

b. The cost of the steel that is used in producing automobiles

c. The rent that the firm pays for office space in a suburb of St. Louis

d. The cost of internet advertising incurred each year

11 127
127. If a firm produces nothing, which of the following costs will be zero?

a. Total cost

b. Fixed cost

c. Opportunity cost

d. Variable cost

128 128. Jack's Car Wash has average variable costs of $2 and average fixed costs of $3 when it produces 300 units of
output (car washes). The firm's total cost is

a. $600.

b. $900.

c. $300.

d. $1,500.

134
134. In the short run, a firm that produces and sells house paint can adjust

a. where to produce along its long-run average-total-cost curve.

b. the size of its factories.

c. how many workers to hire.

d. the location of its factory.

135
135. Suppose that for a particular firm the only variable input into the production process is labor and that output
equals zero when no workers are hired. In addition, suppose that the average total cost when 5 units of output are
produced is $60, and the marginal cost of the sixth unit of output is $120. What is the average total cost when six
units are produced?

a. $60.00

b. $60.00

c. $65.00

d. $70.00

137
137. A firm produces 100 units of output at a total cost of $1,200. If fixed costs are $100,

a. average fixed cost is $12.

b. average variable cost is $11.

c. average total cost is $13.

d. average total cost is $14.

148 148. If a firm uses labor to produce output, the firm's production function depicts the relationship between

a. the number of workers and the quantity of output.

b. marginal product and marginal cost.

c. the maximum quantity that the firm can produce as it adds more capital to a fixed quantity of labor.
 d. fixed inputs and variable inputs in the short run.

** 152
12 152. If marginal cost is rising,

a. average variable cost must be falling.

b. average fixed cost must be rising.

c. marginal product must be falling.

d. marginal product must be rising.

13 153
153. When marginal cost is less than average total cost,

a. marginal cost must be falling.

b. average variable cost must be falling.

c. average total cost is falling.

d. average total cost is rising.

19 155 155. Suppose that for a particular firm the only variable input into the production process is labor and that output
equals zero when no workers are hired. In addition, suppose that when four units of output are produced, the total
cost is $175, and the average variable cost is $33.75. What would the average fixed cost be if ten units were
produced?

a. $4

b. $10

c. $40

d. $135

14 157
157. Marginal cost is equal to average total cost when

a. average variable cost is falling.

b. average fixed cost is rising.

c. marginal cost is at its minimum.

d. average total cost is at its minimum.

158
158. Lim Industries has average variable costs of $1 and average total costs of $12 when it produces 500 units of
output. The firm's total fixed costs equal

a. $11.

b. $13.

c. $5,500.

d. $6,500.

15 161 Table 13-9

Labor Output Fixed Cost Variable Cost

(Number of workers) (Units) (Dollars) (Dollars)

0 0 30 0

1 100 30 15

2 180 30 30

3 240 30 45
 4 280 30 60

5 300 30 75

161. Refer to Table 13-9. For the firm whose production function and costs are specified in the table, its average-
total-cost curve is

a. constant.

b. decreasing.

c. increasing.

d. U-shaped.

22 162 162. The minimum points of the average variable cost and average total cost curves occur where the

a. marginal cost curve lies below the average variable cost and average total cost curves.

b. marginal cost curve intersects those curves.

c. average variable cost and average total cost curves intersect.

d. slope of total cost is the smallest.

165
165. Which of the following costs of publishing a book is a fixed cost?

a. Author royalties of 5 percent per book

b. The costs of paper and binding

c. Shipping and postage expenses

d. Composition, typesetting, and jacket design for the book

168
168. Average total cost is increasing whenever

a. total cost is increasing.

b. marginal cost is increasing.

c. marginal cost is less than average total cost.

d. marginal cost is greater than average total cost.

169
169. Average total cost is very high when a small amount of output is produced because

a. average variable cost is high.

b. average fixed cost is high.

c. marginal cost is high.

d. marginal product is high.

SHORT RUN, LONG RUN, ECONOMIES OF SCALE

16 159 When a factory is operating in the short run,

a. it cannot alter variable costs.

b. total cost and variable cost are usually the same.

c. average fixed cost rises as output increases.

d. it cannot adjust the quantity of fixed inputs.

17 113 In the long run,

a. inputs that were fixed in the short run remain fixed.

b. inputs that were fixed in the short run become variable.

c. inputs that were variable in the short run become fixed.

 d. variable inputs are rarely used.

18 138 If a firm experiences constant returns to scale at all output levels, then its long-run average total cost curve would

a. slope downward.

b. be horizontal.

c. slope upward.

d. slope downward for low output levels and upward for high output levels.

120 Which of the following explains why long-run average total cost at first decreases as output increases?

a. Diseconomies of scale

b. Less-efficient use of inputs

c. Fixed costs becoming spread out over more units of output

d. Gains from specialization of inputs

26 145 In the long run a company that produces and sells popcorn incurs total costs of $1,150 when output is 70 canisters
and $1,000 when output is 100 canisters. The popcorn company exhibits

a. diseconomies of scale because total cost is rising as output rises.

b. diseconomies of scale because average total cost is rising as output rises.

c. economies of scale because total cost is rising as output rises.

d. economies of scale because average total cost is falling as output rises.

15 164 Table 13-11

Listed in the table are the long-run total costs for three different firms.

Quantity 1 2 3 4 5

Firm A 100 100 100 100 100

Firm B 100 200 300 400 500

Firm C 100 300 600 1,000 1,500

164. Refer to Table 13-11. Which firm is experiencing diseconomies of scale?

a. Firm A only

b. Firm B only

c. Firm C only

d. Firm A and Firm B only

16 187 Firms may experience diseconomies of scale when

a. they are too small to take advantage of specialization.

b. large management structures are bureaucratic and inefficient.

c. there are too few employees, and managers do not have enough to do.

d. average fixed costs begin to rise again.

17 196 When a firm experiences constant returns to scale,

a. long-run average total cost is unchanged, even when output increases.

b. long-run marginal cost is greater than long-run average total cost.

c. long-run marginal cost is less than long-run average total cost.

d. the firm is experiencing coordination problems.

19 98 Economies of scale occur when

a. long-run average total costs rise as output increases.

b. long-run average total costs fall as output increases.

c. average fixed costs are falling.

d. average fixed costs are constant.

20 107 Suppose that a firm's long-run average total costs of producing smart phones increases as it produces between
50,000 and 60,000 smart phones. For this range of output, the firm is experiencing

a. diseconomies of scale.

b. constant returns to scale.

c. economies of scale.

d. average returns to scale