Sample Questions on Production and Cost

8/10/2019 Sample Questions on Production and Cost

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Sample Questions on Production and Cost

1. The reason economists assume that firms try to maximize economic profit isa. over time, firms that don't earn profits will have difficulty securing financing to survive

b. firms in the real world always maximize profitc. profit is easier to calculate than revenuesd. if a firm fails to earn a profit in its first year, it will go out of businesse. profit maximization is easier for firms than revenue maximization

AN! A

". #mplicit cost involves a direct cash payment for the use of a resource.a. Trueb. $alse

AN! %

&. All other things constant, higher implicit cost results in lower accounting profit.a. Trueb. $alse

AN! %

. (hich of the following is notan explicit cost)a. salariesb. sales taxesc. the cost of utilities, such as gas and electricityd. insurance premiumse. the value of a firm owner's time

AN! *

+. #f ipco owns the building where it operates, then ifa. the firm pays no rent, there is no opportunity costb. the firm does not rent the building to anyone else, there is no opportunity costc. the firm pays no rent, there is an opportunity costd. its usage of the building precludes it from renting to anyone else, there is an opportunity

coste. the firm could use the building for other things, there is no opportunity cost

AN! -


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. (hich of the following are implicit costs for a typical firm)a. insurance costsb. electricity costsc. opportunity costs of capital owned and used by the firmd. cost of labor hired by the firme. the cost of raw materials

AN! /

0. (hich of the following is not an explicit cost)a. ayment for raw materialsb. The value of the firm2s owner own timec. (ages for the wor3ersd. #nsurance coste. 4tilities payment

AN! %

5. /ash payments for steel to be used in production would be an example ofa. sun3 costsb. fixed costsc. explicit costsd. implicit costse. entrepreneurial costs

AN! /

6. A firm's opportunity costs of using resources provided by the firm's owners are calleda. sun3 costsb. fixed costsc. explicit costs

d. implicit costse. entrepreneurial costs

AN! -

17. 4nli3e implicit costs, explicitcostsa. reflect opportunity costsb. include the value of the owner's timec. are not included in a firm2s accounting statementsd. are actual cash paymentse. do not change as a firm's output changes

AN! -


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11. An implicit cost isa. any cost a firm cannot avoid in the short runb. any expenditure a firm ma3esc. an opportunity costd. accurately measured in accounting statementse. ignored by economists

AN! /

1". 8arge opens an oxygen bar in a building she owns. he used to rent the building to her brother in lawfor 917,777 a year. To open the oxygen bar, 8arge :uit her ;ob as a physician assistant, which paid957,777 a year. As a bar owner, 8arge has to pay 97,777 a year wages for her bartender, spend9"+,777 a year for supplies, and the utilities bill is 96,+77 a year. To cover the start


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1+. *xplicit costs area. not part of opportunity costb. the only cost considered in opportunity costc. exactly the same as implicit costsd. actual monetary payments for resources purchasede. the opportunity costs of using resources owned by the firm

AN! -

1. #f all my savings are invested in my consulting company, an increase in the interest rate increases myimplicit costs.a. Trueb. $alse

AN! A

10. #f a firm's economic profit is positive, its accounting profit must also be positive.a. Trueb. $alse

AN! A

15. The difference between a firm's total revenue and what must be paid to attract resources from their bestalternative use is calleda. total revenueb. utilityc. economic profitd. coste. production efficiency

AN! /

16. =pportunity cost usuallya. cannot be measuredb. applies to labor but not to capitalc. is involved in calculating economic profitd. is greater than the cash payment made to a resourcee. is less than the cash payment made to a resource

AN! /


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"7. >ohn moved his office from a building he was renting downtown to the carriage househe owns in bac3 of his house. ?ow will his costs change)a. explicit and implicit costs riseb. explicit costs rise@ implicit costs fallc. explicit and implicit costs falld. explicit costs fall@ implicit costs rise

e. not enough information is given

AN! -

"1. A young chef is considering opening his own sushi bar. To do so, he would have to :uit his current ;ob,which pays 9"7,777 a year, and ta3e over a store building that he owns and currently rents to hisbrother for 9,777 a year. ?is expenses at the sushi bar would be 9+7,777 for food and 9",777 for gasand electricity. (hat are his explicit costs)a. 9",777b. 9,777c. 905,777d. 9+",777

e. 90",777AN! -

"". A young chef is considering opening his own sushi bar. To do so, he would have to :uit his current ;ob,which pays 9"7,777 a year, and ta3e over a store building that he owns and currently rents to hisbrother for 9,777 a year. ?is expenses at the sushi bar would be 9+7,777 for food and 9",777 for gasand electricity. (hat are his implicit costs)a. 9",777b. 9,777c. 905,777d. 9+",777e. 90",777

AN! A

"&. Two friends, -iane and am, own and run a bar. -iane tends bar on 8onday, (ednesday, and $ridayand receives a wage in addition to tips. am tends bar on Tuesday, Thursday, and aturday andreceives only tips. (hich of the following represents an implicit cost of operating the bar)a. -iane's wageb. am's timec. -iane's tipsd. am's tipse. both -iane's and am's tips

AN! %


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". 8aryann and -on want to open their own deli. To do so, 8aryann must give up her ;ob, at which sheearns 9"7,777 per year, and -on must give up his part


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"5. 8arge opens an oxygen bar in a building she owns. he used to rent the building toher brother in law for 917,777 a year. To open the oxygen bar, 8arge :uit her ;ob as a physicianassistant, which paid 957,777 a year. As a bar owner, 8arge has to pay 97,777 a year wages for herbartender, spend 9"+,777 a year for supplies, and the utilities bill is 96,+77 a year. To cover the start


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&". (hich of the following would be shown on #%8's accounting statement)a. revenue, implicit costs, explicit costs, and economic profitb. revenue, implicit costs, explicit costs, and accounting profitc. revenue, explicit costs, and economic profitd. revenue, explicit costs, and accounting profite. revenue, implicit costs, and accounting profit

AN! -

&&. 8aryann and -on want to open their own deli. To do so, 8aryann must give up her ;ob, at which sheearns 9"7,777 per year, and -on must give up his part


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&. ipco's accounting profit is e:ual to itsa. total revenue minus opportunity costsb. total revenue plus opportunity costsc. total revenue minus imputed costsd. total revenue minus explicit costse. total revenue minus explicit and implicit costs

AN! -

&0. *conomic profit is defined asa. total revenue minus priceb. price minus :uantityc. total revenue minus what must be paid to resources to attract them from their best alternative

used. total revenue divided by what must be paid to resources to attract them from their best

alternative usee. total revenue plus what must be paid to resources to attract them from their best alternative use

AN! /

&5. ipco's economic profit is e:ual to itsa. total revenue minus accounting profitb. total revenue minus explicit costsc. total revenue plus accounting profitd. total revenue plus opportunity costse. accounting profit minus implicit costs

AN! *

&6. Accounting profit isa. always less than economic profit

b. never less than economic profitc. e:ual to economic profit if a normal profit is earnedd. less than economic profit only when implicit costs are greater than explicit costse. greater than economic profit only when implicit costs are greater than explicit costs

AN! %

7. uppose %en buys out >erry's ownership in the firm but retains him as a salaried employee. #f so,a. economic profit increasesb. economic profit decreasesc. there is no change in economic profitd. there is no change in accounting profite. accounting profit increases

AN! /


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1. Normal profit is defined asa. accounting profitb. economic profitc. profit necessary to ensure that opportunity costs are coveredd. accounting profit minus economic profite. economic profit minus accounting profit

AN! /

". uppose a soccer coach has been ma3ing 9"+,777 per year but gives up his coaching ;ob in order toma3e lace doilies. #f his revenue from the sale of these doilies is 9+7,777 and his materials cost9"7,777, then his economic profit isa. 9+,777b. 9"+,777c. 9&7,777d. 9+7,777e. 957,777

AN! A

&. uppose %ob leaves his 9+7,777


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+. #f Beneral 8otors is earning only a normal profit,a. it is ma3ing economic profitb. it is brea3ing evenc. it is suffering an economic lossd. it is covering only explicit costse. it is covering only implicit costs

AN! %

. #f the 8oney tore earns a normal profit this year, itsa. economic profit is e:ual to its accounting profitb. economic profit is zeroc. economic profit is e:ual to the average accounting profit in other industriesd. accounting profit is zeroe. accounting profit is less than its economic profit

AN! %

0. #f the %aloney tore earns more than a normal profit, itsa. economic profit must be greater than its accounting profitb. economic profit is positivec. economic profit is, therefore, e:ual to its accounting profitd. accounting profit is zeroe. accounting profit is less than its economic profit

AN! %

5. uppose a professor gives up her teaching ;ob to devote her time to writing textboo3s. #f salaries ofprofessors rise,a. her accounting profit will riseb. her accounting profit will fall

c. her explicit costs will rised. her economic profit from textboo3s will falle. her economic profit from textboo3s will rise

AN! -

6. uppose >oan uses her savings to purchase computer e:uipment for her new consulting business. oonafter this, the mar3et interest rate rises. As a result, hera. explicit costs rise immediatelyb. accounting profit falls immediatelyc. accounting profit rises immediatelyd. economic profit rises immediatelye. economic profit falls immediately

AN! *


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+7. >ohn moved his office from a building he was renting downtown to the carriage house he owns in bac3of his house. ?ow will his profit change)a. #mplicit costs fall.b. *xplicit costs remain unchanged while implicit costs rise.c. *conomic profit must fall.d. *xplicit costs rise.

e. Accounting profit will rise.

AN! *

Exhibit 7-1

Total evenue 9177,777

Assistant2s salary 9 "7,7778aterial C e:uipment 1+,777

$orgone salary &7,777$orgone interest 1,777$oregone building rental 17,777

+1. ally owns a small business that she operates in a small building she owns. Biven the information in*xhibit 0


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+. uppose # have 91,777 to put into a one


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+6. #n the short run, all costs are fixed.a. Trueb. $alse

AN! %

7. #n the long run, all inputs are variable.a. Trueb. $alse

AN! A

1. #nputs that can be increased or decreased in the short run are calleda. fixed inputsb. variable inputsc. economic inputsd. accounting inputse. normal inputs

AN! %

". (hich of the following is most li3ely to be a fixed resource for aul's /ountry $resh ies, #nc.)a. berriesb. flourc. ba3ersd. eggse. ovens

AN! *

&. %art operates a lemonade stand in front of his house. ?is father wor3s at the pringfield Nuclear

ower lant. (hich of the following is most li3ely to be true)a. The long run is the same for the power plant as it is for the lemonade stand.b. The long run is longer for the power plant than it is for the lemonade stand.c. The long run is shorter for the power plant than it is for the lemonade stand.d. (e cannot compare the long runs because these are different businesses.e. #t's impossible for the power plant short run to be shorter than the lemonade stand's long run.

AN! %


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. The short run is a period of timea. e:ual to or less than six monthsb. during which all resources may be variedc. during which all resources are fixedd. during which at least one resource is fixede. during which at least one resource may be varied

AN! -

+. (hich of the following is most li3ely to be a fixed resource for the /ity lic3er's -ude anch)a. the lodge where the guests stayb. food for the guestsc. stable hands to ta3e care of the horsesd. hay for the horsese. water for the horses

AN! A

. (hich of the following is most li3ely to be a fixed resource for the peedy (ord rocessing andDsumD /ompany)a. floppy dis3sb. typistsc. computer terminalsd. electricitye. paper

AN! /

0. (hich of the following probably has the shortest long run)a. a law firmb. a steel mill

c. an automobile plantd. a tire factorye. an aircraft engine factory

AN! A

5. (hich of the following is a long


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6. (hich of the following is a short


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0. #f marginal product is negative, total product must be negative.a. Trueb. $alse

AN! %

0+. #f a firm is experiencing diminishing marginal returns, its marginal product is negative.a. Trueb. $alse

AN! %

0. #f a firm is experiencing diminishing marginal returns, its marginal product is declining.a. Trueb. $alse

AN! A

00. The additional output obtained by adding another unit of labor to the production process is called

a. the marginal cost of laborb. the average output of laborc. a variable costd. the marginal product of labore. the marginal utility of labor

AN! -

05. 8arginal product is defined asa. the increase in revenue that occurs when an additional unit of a resource is addedb. the increase in output that occurs when all resources are increased by the same proportionc. the increase in output that occurs when an additional unit of a resource is added, holding

all other resources constantd. the amount of additional resources needed to increase output by one unit when allresources are increased by the same amount

e. the amount of additional money needed to increase output by one unit when all resourcesare held constant

AN! /


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Exhibit 7-2

FaborTotal product

Gpairs of shoesH

7 71 "7

" +7& 0+ 57+ 0+

06. Biven the information in *xhibit 0


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5&. As roduct /o. adds the first four wor3ers to its production process in the short run, its output risesfrom 7 to 1" to "+ to &+ to &. Addition of the fifth wor3er will most li3ely lead to an output ratea. greater than +1b. e:ual to +1c. less than +1d. greater than +1 if the firm experiences diseconomies of scale

e. none of the above

AN! /

Exhibit 7-12

esourceGFaborH

Total productGT


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5. Biven the information in *xhibit 0


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56. #n *xhibit 0


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Exhibit 7-4

4nits oflabor

Totalproduct

8arginalproduct

7 7 erry2s iceerry2s iceerry2s ice


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11. #f fixed cost at L M 177 is 91&7, thena. fixed cost at L M 7 is 97b. fixed cost at L M 7 is less than 91&7c. fixed cost at L M "77 is 9"7d. fixed cost at L M "77 is 91&7e. it is impossible to calculate fixed costs at any other :uantity

AN! -

110. (hich of the following would notbe considered a fixed cost for a law firm)a. paper for the photocopy machineb. property taxesc. insurance premiumsd. license feese. interest on loans

AN! A

115. $ixed costs are defined asa. the total costs of a firm's productionb. the additional cost of the last unit producedc. costs that increase proportionately as the :uantity produced increasesd. costs that do not vary as :uantity produced increasese. implicit costs only

AN! -

116. (hen marginal cost is decreasing, total cost is rising.a. Trueb. $alse

AN! A

1"7. (hich of the following best explains why marginal cost eventually increases as output increases)a. economies of scale occurb. average cost increasesc. total cost increasesd. marginal product decreasese. fixed cost is constant

AN! -


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1"1. (hat is true of marginal costwhen marginal returns are increasing)a. #t is negative and increasing.b. #t is negative and decreasing.c. #t is positive and increasing.d. #t is positive and decreasing.e. #t is positive and has a constant slope.

AN! -

1"". (hat is true of marginal costwhen marginal returns are decreasing)a. #t is negative and increasing.b. #t is negative and decreasing.c. #t is positive and increasing.d. #t is positive and decreasing.e. #t is positive and has a constant slope.

AN! /

1"&. (hat is the relationship between marginal cost and marginal product)a. The two are not related.b. (hen marginal product increases, marginal cost increases.c. (hen marginal product increases, marginal cost falls.d. (hen marginal product is negative, marginal costs are negative.e. (hen diminishing marginal returns set in, marginal costs fall.

AN! /

1". (hen a firm is experiencing diminishing marginal returns, marginal cost isa. risingb. fallingc. constant

d. rising at first, then fallinge. zero

AN! A

1"+. As output rises, marginal product eventually diminishes anda. marginal cost increasesb. average cost fallsc. total cost fallsd. fixed cost is increasinge. average product is negative

AN! A


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1". The Toys


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1&7. uppose Build produces +,777 guitars per year. #ts average total cost is 967, and itsfixed cost is 9"+7,777. (hat is its variable cost)a. 9"+7,777b. 9+7,777c. 9"+,777d. 9+,777

e. 9"77,777

AN! *

1&1. (hich of the following statements is true) #f the marginal product of labor diminishes,a. average fixed cost risesb. average variable cost is constantc. marginal cost risesd. average total cost must risee. total cost rises at a diminishing rate

AN! /

1&". #f labor is a firm's only variable input, marginal cost ultimately depends ona. fixed costb. how much profit is madec. the price of the good producedd. how much output each wor3er producese. fixed cost per unit

AN! -

1&&. =n a graph of production costs, the vertical distance between the fixed cost curve and the total costcurve at a specific :uantity representsa. variable cost

b. average variable costc. average total costd. average fixed coste. marginal cost

AN! A

1&. Total fixed cost divided by the level of output yieldsa. average variable cost per unitb. average fixed costs per unitc. marginal cost per unitd. average total cost per unite. marginal productivity per unit of fixed resource

AN! %


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Exhibit 7-5

=utputper day

(or3ersper day

Totalcost

7 7 917+ 1 "7

1+ " &715 & 7"7 +7

1&+. #n *xhibit 0


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1&6. #n *xhibit 0


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1&. #n *xhibit 0


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1. Total cost is calculated asa. average fixed cost plus average variable costb. fixed cost plus variable costc. the additional cost of the last unit producedd. marginal cost plus variable coste. marginal cost plus fixed cost

AN! %

10. Total cost is calculated asa. $/ 8/b. $/ J 8/c. GI/ $/H J 8/d. I/ $/e. I/ output

AN! -

15. A firm enters into a consent decree to avoid an even greater legal setbac3. #f the terms of the consentdecree effectively double the firm's fixed costs, thena. marginal cost more than doublesb. marginal cost doublesc. marginal cost remains unchangedd. average total cost remains unchangede. average variable cost doubles

AN! /

16. (hen marginal product is decreasing, marginal cost isa. less than zerob. e:ual to zero

c. constantd. decreasinge. increasing

AN! *

1+7. #f a firm shuts down in the short run and produces no output, its total cost will bea. zerob. e:ual to total variable costc. e:ual to total fixed costd. e:ual to explicit costs onlye. impossible to calculate

AN! /


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1+1. #f total cost at L M 7 is 9177 and total cost at L M 17 is 9+77, then average variablecost at L M 17 isa. 9+77b. 977c. 9+7d. 97

e. 917

AN! -

1+". >erry2s iceerry2s ice


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Exhibit 7-

1++. #n *xhibit 0


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1+5. #n *xhibit 0


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1&. #f the average height in the classroom were + feet 17 inches and atric3 *wing, who is0 feet tall, came in and sat down,a. the average height would rise to 0 feetb. the marginal height would be + feet 17 inchesc. the average height would not changed. the average height would rise somewhat

e. the marginal height would rise

AN! -

1. (hich of the following correctly describes the relationship between the marginal cost and averagevariable cost curves)a. 8/ is everywhere above AI/b. AI/ is everywhere above 8/c. 8/ crosses AI/ at AI/'s minimum pointd. 8/ crosses AI/ at 8/'s minimum pointe. both AI/ and 8/ first rise and then fall

AN! /

1+. #f marginal cost exceeds average variable cost,a. average variable cost is negativeb. average variable cost is increasingc. marginal cost is greater than average total costd. average variable cost is decreasinge. average fixed cost is increasing

AN! %

1. #f marginal cost is less than average total cost,a. marginal cost must be fallingb. average total cost must be increasingc. average variable cost e:uals average total costd. average variable cost must be decreasinge. average variable cost may be increasing or decreasing

AN! *


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10. (hich of the following is true of the 8/ curve)a. #t intersects the AT/ curve at its minimum, but it does not intersect the AI/ curve at its

minimum.b. #t intersects the AI/ curve at its minimum, but it does not intersect the AT/ curve at its

minimum.c. #t intersects both the AT/ and the AI/ curves at their minimums.

d. #t intersects both the AT/ and the A$/ curves at their minimums.e. #t intersects both the AI/ and the A$/ curves at their minimums.

AN! /

15. >erry2s ice


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AN! A

10". The marginal cost curve intersects the average variable cost curve GAI/Ha. only when the AI/ is risingb. at the AI/ curve's maximum pointc. at the AI/ curve's minimum point

d. only when the AI/ is sloping downwarde. when the AI/ intersects the fixed cost curve

AN! /

10&. The relationship between average and marginal variables can be stated as follows! if the marginal isgreater than the average,a. the average is increasingb. the average is decreasingc. the marginal is increasingd. the marginal is decreasinge. the total is decreasing

AN! A

10. (ith respect to the average cost curves, the marginal cost curvea. intersects average total cost, average fixed cost, and average variable cost at their

minimum pointsb. intersects average total cost, average fixed cost, and average variable cost at their

maximum pointsc. intersects both average total cost and average variable cost at their minimum pointsd. intersects average total cost where it is increasing and average variable cost where it is

decreasinge. intersects only average total cost at its minimum point

AN! /


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10+. The shape of short


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157. $or each size of plant a manufacturer could build, there is a differenta. long


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Exhibit 7-1"

15&. #n *xhibit 0, and E represent, respectively,a. marginal product, average product, and total productb. average fixed cost, average total cost, and average variable costc. marginal cost, average total cost, and average variable cost

d. average total cost, marginal cost, and average variable coste. marginal cost, average product, average total cost

AN! /

15. The shape of the long


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150. *conomies of scale occur wherea. long


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16". *conomies of scale can be caused bya. all of the followingb. short


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160. #f Beneral *lectric finds that when it doubles both its plant size and the amount of associated inputs,its output level does not double, thena. the law of diminishing returns is in effectb. long


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"7". The least

Sample Questions on Production and Cost

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