Econ 2005 - Chapter 7
Explicit Cost
opportunity cost of resources employed by a firm that takes the form of cash payments
Average Total Cost
total cost divided by output, or ATC = TC/q; also the sum of average fixed cost and average variable cost, or ATC = AFC + AVC
B
A firm's _____ are its actual cash payments for resources. a. implicit costs b. explicit costs c. marginal costs d. sunk costs
A
According to the law of diminishing marginal returns, as more of a variable input is combined with fixed amounts of other resources, _____. a. the additions to output will eventually decrease b. the additions to output will become constant c. total output will initially decrease and then increase d. the additions to output cannot increase
C
Accounting profit is defined as the difference between a firm's: a. total revenue and its implicit costs. b. total revenue and total cost, including both explicit and implicit costs. c. total revenue and its explicit costs. d. explicit costs and implicit costs.
C
Calculate the value of the total cost incurred by a firm if its variable cost is $1,000 and its fixed cost is $3,250. a. The total cost incurred by the firm is $3,250. b. The total cost incurred by the firm is $1,000. c. The total cost incurred by the firm is $4,250. d. The total cost incurred by the firm is $2,250.
C
Diseconomies of scale result from _____, whereas diminishing marginal returns result from _____. a. a larger firm size; using more fixed resources in a firm of a given size b. a smaller firm size; using more fixed resources in a firm of a given size c. a larger firm size; using more variable resources in a firm of a given size d. a smaller firm size; using more variable resources in a firm of a given size
C
Economic profit is defined as the difference between: a. total revenue and total explicit cost. b. total revenue and total implicit cost. c. total revenue and total costs, both explicit and implicit. d. explicit costs and implicit costs.
C
Economists assume that the goal of a firm is to: a. maximize utility. b. minimize production. c. maximize total profit. d. maximize total revenue.
C
Economists define the short run as a time period in which: a. all resources are fixed. b. the size of a firm can be varied. c. at least one input is fixed. d. all resources are variable.
C
Normal profit refers to: a. a firm's total revenue minus its implicit costs. b. a firm's total revenue minus its explicit and implicit costs. c. the profit earned by a firm when all resources used by the firm earn their opportunity cost. d. the profit earned by a firm when explicit costs are deducted from its total revenue.
C
Once decreasing marginal returns set in a production process, _____ declines. a. average product b. total revenue c. marginal product d. total product
B
The change in output due to a one-unit change in labor usage, the level of usage of other inputs remaining unchanged, is called: a. the average product of labor. b. the marginal product of labor. c. the total product of labor. d. the marginal revenue product.
Average Fixed Cost
fixed cost divided by output, or AFC = FC/q
Average Variable Cost
variable cost divided by output, or AVC = VC/q
C
The general health insurance policy bought by a firm for its employees is an example of the firm's: a. sunk cost. b. implicit costs. c. explicit costs. d. variable cost.
D
The rising marginal cost curve intersects: a. the minimum point of the total cost curve. b. the average variable cost curve and the average total cost curve when they are upward sloping. c. the average total cost curve at its downward-sloping portion. d. the minimum points of both the average variable cost and average total cost curves.
A
The total cost is: a. the sum of fixed cost and variable cost. b. the cost that is independent of the firm's rate of output. c. the production cost that changes as the rate of output changes. d. the difference between fixed cost and variable cost.
A
Total cost divided by total output yields: a. average total cost. b. sunk cost. c. marginal cost. d. opportunity cost.
C
When a firm experiences decreasing marginal returns, _____. a. the fixed cost increases b. the marginal cost of output decreases c. the marginal cost of output increases d. the total cost of output decreases
B
Which of the following best describes a production function? a. The relationship between consumer preferences and market demand. b. The relationship between the amount of resources employed and the total output produced by a firm. c. The relationship between the quantity of labor employed and total cost. d. The relationship between the price and quantity supplied of a product by sellers in a market.
B
A firm can experience diseconomies of scale due to: a. the use of more variable resources in a firm of a fixed size. b. a lack of coordination between different divisions of the firm. c. a decrease in the fixed costs incurred by the firm. d. a decrease in the scale of operation of the firm.
C
A firm's implicit costs comprise _____ by the firm. a. the payroll tax paid b. the revenue used to pay interest on loans c. the value of the entrepreneur's land used d. the health insurance expenses incurred
D
Fixed cost is: a. the cost incurred on resources such as labor. b. inversely related to the amount of input employed. c. greater than variable cost in the long run. d. positive in the short run even if no output is produced.
A
Identify a statement that is true of the short run. a. Output can be changed in the short run only by adjusting variable resources. b. A firm cannot change its output. c. Output can be changed in the short run by altering a firm's size. d. A firm cannot hire more workers in the short run.
C
The cost curve that shows the lowest per-unit cost of producing any given level of output is called: a. the variable cost curve. b. the fixed cost curve. c. the long-run average cost curve. d. the long-run marginal cost curve.
C
Identify the correct statement. a. When there are negative marginal returns, the total product rises. b. When there are diminishing but positive marginal returns, the total product falls. c. When there are negative marginal returns, the total product falls but is not necessarily negative. d. When there are diminishing but positive marginal returns, the total product rises at an increasing rate.
A
If average variable cost is falling, we know that: a. marginal cost is definitely less than average variable cost. b. marginal cost is definitely greater than average variable cost. c. marginal cost is definitely rising. d. marginal cost is definitely falling.
A
If the long-run average cost of a firm increases as the size of the firm increases, then the firm is experiencing: a. diseconomies of scale. b. increasing marginal returns. c. economies of scale. d. diminishing marginal returns.
C
Increasing marginal cost is associated with: a. decreasing average product. b. increasing total product. c. decreasing marginal product. d. increasing marginal product.
B
Suppose a firm earns a total revenue of $560,000. Assume that the firm purchases raw materials worth $100,000 and pays $65,000 as wages. Also assume that the firm can earn a rent of $50,000 if it gives out its building on rent and that the firm foregoes an interest of $10,000 on savings. The firm earns and accounting profit equal to _____. a. $460,000 b. $395,000 c. $350,000 d. $760,000
A
Suppose a firm earns a total revenue of $560,000. Assume that the firm purchases raw materials worth $100,000 and pays $65,000 as wages. Also assume that the firm can earn a rent of $50,000 if it gives out its building on rent, and that the firm foregoes an interest of $10,000 on savings. The normal profit earned by the firm is: a. $60,000. b. $165,000. c. $40,000. d. $295,000.
A
Suppose a firm uses its funds to purchase a new machine. This is an example of the firm's _____. a. explicit costs b. total cost c. variable cost d. implicit costs
C
Suppose a small business takes in a monthly revenue of $200,000. Labor, rental, energy, and other purchased input costs come to a total of $170,000. The entrepreneur's monthly opportunity cost of her time invested in the business is $5,000 (this is what she could earn working elsewhere), and the entrepreneur could get a return of $5,000 each month if she sold her business and invested the net proceeds in a financial asset such as a treasury bond. Her monthly economic profit equals _____. a. $190,000 b. $30,000 c. $20,000 d. $200,000
B
Suppose total cost is $1,000 when output is zero, $1,200 when output is one unit, and $1,500 when output is two units, then which of the following is true? a. Average total cost is $500 when two units of output are produced. b. The marginal cost of producing the second unit of output is $300. c. The marginal cost of producing the first unit of output is $1,200. d. Total fixed cost is $1,500.
B
Which of the following best describes marginal cost? a. Variable cost divided by the quantity of output produced. b. Change in total cost resulting from a one-unit change in output. c. Total cost divided by the quantity of output produced. d. The sum of fixed cost and variable cost.
C
Which of the following best describes the law of diminishing marginal returns? a. The empirical fact that positive economic profits will tend to decline over time as new firms attracted by the extra-normal profit opportunity enter the market. b. When more and more capital per labor is used in production, the marginal product of labor eventually declines and could become negative. c. When more and more of a variable resource is added to a given amount of a fixed resource, the resulting change in output will eventually diminish and could become negative. d. The notion that as a person consumes more and more of a good, such as 12-ounce cups of lemonade, the marginal utility from each additional cup will tend to decline.
D
Which of the following is a way in which firms can achieve economies of scale? a. Producing different products in the same plant. b. Product differentiation. c. Using more workers than are actually needed. d. Increasing the scale of operation.
D
Which of the following is an explicit cost? a. The opportunity cost of the money a business owner has invested in a firm. b. The price of the entrepreneur's land used for constructing a factory and a warehouse. c. The opportunity cost of an entrepreneur's time invested in a firm. d. The wages a firm pays to its workers.
A
Which of the following represents the key difference between the short run and the long run? a. In the short run, at least one of the firm's resources is fixed, while in the long run, all resources under the firm's control are variable. b. In the long run, at least one of the firm's resources is fixed, while in the short run, all resources under the firm's control are variable. c. The short run is the period in which a firm can earn only normal profits, while the long run is the period in which the firm can earn economic profits. d. In the long run, at least one of the firm's resources is fixed, while in the short run, all resources under the firm's control are fixed.
A
Which of the following statements is true? a. Any accounting profit in excess of a normal profit is an economic profit. b. Any economic profit in excess of a normal profit is an accounting profit. c. Accounting profit equals a firm's total revenue minus its explicit and implicit costs. d. A firm's total revenue minus its implicit costs is known as economic profit.
B
Which of the following statements is true? a. Firms that strive and thrive in an industry are those that use labor-intensive means of production. b. Firms that strive and thrive in an industry are those that are more profitable than other firms. c. Economists assume that the goal of a firm is to maximize total revenue. d. The goal of a firm is to supply a product that maximizes consumers' utility.
A
Which of the following statements is true? a. In the long run, for any output level, a firm can select a plant size that will allow it to minimize average total cost. b. In the long run, a firm is committed to a particular plant size, and thus, it cannot vary any input. c. The long-run average cost curve connects the minimum points on marginal cost curves for different plant sizes. d. In the long run, a firm is committed to a particular plant size and can only vary such resources as labor and some material inputs.
A
_____ are forces that cause a reduction in a firm's average cost as the scale of operation increases in the long run. _____ are forces that cause a firm's average cost to increase as the scale of operation increases in the long run. a. Economies of scale; diseconomies of scale b. Diseconomies of scale; economies of scale c. Decreasing returns to a factor; increasing returns to a factor d. Increasing returns to a factor; decreasing returns to a factor
A
_____ costs represent a firm's opportunity costs of using its own resources or those provided by its owners without a corresponding cash payment. a. Implicit b. Sunk c. Marginal d. Explicit
Constant Long Run Average Cost
a condition that occurs if, over some range of output, long-run average cost neither increases nor decreases with changes in firm size
Long Run Average Cost Curve
a curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies; also called the planning curve
Normal Profit
a firm's accounting profit when all resources earn their opportunity cost; equal to implicit cost
Implicit Cost
a firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment
Total Product
a firm's total output
Economic Profit
a firm's total revenue minus its explicit and implicit costs
Accounting Profit
a firm's total revenue minus its explicit costs
Long Run
a period during which all resources under the firm's control are variable
Short Run
a period during which at least one of a firm's resources is fixed
Variable Cost
any production cost that changes as the rate of output changes
Fixed Cost
any production cost that is independent of the firm's rate of output
Variable Resource
any resource that can be varied in the short run to increase or decrease production
Fixed Resource
any resource that cannot be varied in the short run
Law of Diminishing Marginal Return
as more of a variable resource is added to a given amount of other resources, marginal product eventually declines and could become negative
Diseconomies of Scale
forces that may eventually increase a firm's average cost as the scale of operation expands in the long run
Economies of Scale
forces that reduce a firm's average cost as the scale of operation expands in the long run
Marginal Cost
the change in total cost resulting from a one-unit change in output; the change in total cost divided by the change in output, or MC = TC/q
Marginal Product
the change in total product when a particular resource increased by one unit, all other resources constant
Minimum Efficient Scale
the lowest rate of output at which a firm takes full advantage of economies of scale
Increasing Marginal Return
the marginal product of a variable resource increases as each additional unit of that resource is employed
Production Function
the relationship between resources employed and a firm's total product
Total Cost
the sum of fixed cost and variable cost, or TC = FC + VC
