chapter 13

Suppose that Tyrone has an opportunity to buy an Espresso Bar. He will have to use $100,000 of his savings to start the business. The return on his savings averages 10 percent. He is currently making $40,000 per year as a manager of a Starbucks Coffee shop. From the espresso bar's accountant Tyrone learns that the espresso bar currently has sales of $200,000 per year and accounting costs of $145,000 per year. Would Tyrone be better off buying the espresso bar? a. He would be worse off buying the espresso bar because he would incur an economic loss of $5,000 per year. c. He would be better off buying the espresso bar because he could make an economic profit of $5,000 per year. b. He would be no better off buying the espresso bar because he would earn a zero economic profit. d. He would be worse off buying the espresso bar because he would lose his $40,000 per year job.

He would be better off buying the espresso bar because he could make an economic profit of $5,000 per year.

Which of the following statements about profits is false? a. It is possible to have negative economic profits (losses) and positive accounting profits. b. It is possible to have positive accounting profits and zero economic profits. c. It is possible to have positive economic profits and negative accounting profits. d. Accounting profits are always larger than economic profits.

It is possible to have positive economic profits and negative accounting profits.

The cost of producing an additional unit of a good is not the same as the average cost of the good.

t

____ 37. The shape of the marginal cost curve tells a producer something about the marginal product of her workers.

t

An example of an explicit cost of production would be a. the cost of forgone labor earnings for an entrepreneur. b. the lost opportunity to invest in other capital markets when the money is invested in one's business. c. the money paid for flour by a baker. d. None of the above are correct.

the money paid for flour by a baker.

A firm will stay in business in the long run if it makes a. an economic loss. b. a zero accounting profit. c. enough revenue to cover all explicit costs. d. a zero economic profit.

a zero economic profit.

The long run is a period of time in which __________ is called the a. all inputs are variable. b. some inputs are fixed. c. some inputs are variable. d. all inputs are fixed.

all inputs are variable.

Table 5.1 Total Revenue=$500,000 Wages=$200,000 Utilities=$5,000 Supplies=$45,000 Raw Materials=$200,000 Assume that the business owner has $50,000 invested in this firm and owns the building in which the business is located. Suppose that the owner could invest the $50,000 at an annual interest rate of 6 percent, lease the building to another business for $20,000 per year and earn a salary of $30,000 per year by going to work as a manager in a corporation. ____ 3. The firm in Table 5.1 is making a. zero economic profits. b. economic profits of $50,000. c. economic losses of $3,000. d. economic profits of $53,000.

economic losses of $3,000.

____ 35. If the marginal cost curve is rising, so is the average total cost curve.

f

____ 36. Average total cost reveals how much total cost will change as the firm alters its level of production.

f

Firms that shut down in the short run still have to pay their a. variable costs. c. total cost. b. fixed costs. d. All of the above are correct.

fixed costs.

Diminishing returns sets in when a. marginal product begins to decrease. b. average product begins to decrease. c. total product begins to decrease. d. marginal product becomes negative.

marginal product begins to decrease.

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.

marginal product must be falling.

All of the following are true about the law of diminishing returns except that it a. occurs when at least one input is fixed and the others are variable. b. sets in when the marginal product of labor begins to fall. c. occurs only in the long run. d. occurs after some point because as more workers are employed there is less capital per worker.

occurs only in the long run. `

Refer to Scenario 13-3. In producing the 5,000 staplers, the firm's average total cost was a. $6. b. $7. c. $8. d. $9.

$9.

Average total cost equals a. change in total costs divided by quantity produced. b. change in total costs divided by change in quantity produced. c. (fixed costs + variable costs) divided by quantity produced. d. (fixed costs + variable costs) divided by change in quantity produced.

(fixed costs + variable costs) divided by quantity produced.

Which of the following is an implicit cost of owning a business? (i) interest expense on existing business loans (ii) forgone savings account interest when personal money is invested in the business (iii) menetary payment for shipping a. (i) only b. (ii) only c. (i) and (ii) d. All of the above are correct.

(ii) only

If a firm produces nothing in the short run, which of the following costs will be zero? a. total cost b. fixed cost c. opportunity cost d. variable cost

variable cost

Refer to Scenario 13-3. The firm's economic profit for the year was a. $-35,000. b. $-5,000. c. $10,000. d. $40,000.

$-5,000.

Scenario 13-3 A certain firm produces and sells staplers. Last year, it produced 5,000 staplers and sold each stapler for $8. In producing the 5,000 staplers, it incurred variable costs of $30,000 and a total cost of $45,000. 28. Refer to Scenario 13-3. In producing the 5,000 staplers, the firm's average fixed cost was a. $3 b. $4 c. $5 d. $7

$3

In Table 5.1, the firm's implicit cost per year is a. $30,000 c. $3,000 b. $20,000 d. $53,000

$53,000

Refer to Scenario 13-3. In producing the 5,000 staplers, the firm's average variable cost was a. $2. b. $4. c. $6. d. $8.

$6.

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.

always declines with increased levels of output.

Marginal cost tells us the a. value of all resources used in a production process. b. marginal increment to profitability when price is constant. c. amount by which total cost rises when output is increased by one unit. d. amount by which output rises when labor is increased by one unit.

amount by which total cost rises when output is increased by one unit.

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.

average total cost is at its minimum.

When marginal cost exceeds average total cost, a. average fixed cost must be rising. b. average total cost must be rising. c. average total cost must be falling. d. marginal cost must be falling.

average total cost must be rising.

The firm in Table 5.1 is making an accounting profit of a. $100,000 b. $50,000 c. $200,000 d. $400,000

b. $50,000

For the firm in Table 5.1 to stay in this business in the long run a. its implicit costs would have to increase by $3,000. c. its normal profits would have to increase by $3,000. b. its revenues would have to increase by $3,000. d. nothing would have to happen because it is making economic profits.

b. its revenues would have to increase by $3,000.