# Econ 120 Exam #3

Economists assume that the typical person who starts her own business does so with the intention of
maximizing proftis
What can be added to profit to obtain total revenue?
total costs
Trevor’s Tire Company produced and sold 500 tires. The average cost of production per tire was \$50. Each tire sold for a price of \$65. Trevor’s Tire Company’s total costs are:
\$25,000

(500 tires X \$50 production cost)

John has decided to start is own lawn-mowing business. To purchase the mowers and the trailer to transport the mowers, John withdrew \$1,000 from his savings account, which was earning 3% interest, and borrowed an additional \$2,000 from the bank at an interest rate of 7%. What is John’s annual opportunity cost of the financial capital that has been invested in the business?
\$170

(explicit costs + implicit costs)

An example of an opportunity cost that is an implicit cost is
the value of the business owner’s time
Foregone investment opportunities are an example of
an implicit cost
Which of the following statements are correct?
a. Assuming that explicit costs are positive, economic profits 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
B, Assuming that implicit costs are positive, accounting profit is greater than economic profit.
Economic profit will
never exceed accounting profit
Which of the following expressions is correct?
a. accounting profit = total revenue – explicit costs
b. economic profit = total revenue – explicit costs
c. economic profit = total revenue – explicit costs
A. accounting profit = total revenue – explicit costs
A firm’s opportunity costs of production are equal to its
explicit costs + implicit costs
A production function describes
how a firm turns inputs to outputs
When a firm’s only variable input is labor, then the slope of the production function measures the
marginal product of labor
On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires 2 workers. He is able to produce 4,400 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 5,600 bushels of wheat when he hires 4 workers
b. The farmer is able to produce 5,400 bushels of wheat when he hires 4 workers
c. The farmer is able to produce 5,200 bushels of wheat when he hires 4 workers
d. Any of the above could be correct.
D. Any of the above could be correct
The value of a business owner’s time is an example of
an opportunity cost
Fixed costs can be defined as costs that
are incurred even if nothing is produced
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 the firm hires 2 workers, the total cost of production is \$100. When the firm hires 3 workers, the total cost of production is \$120. In addition, assume that the variable cost per unit of labor is the same regardless of the number of units of labor that are hired. What is the firm’s fixed cost?
\$60
VC TC
2 workers = \$100
3 workers = \$120 Marginal Cost = 20

Fixed Cost = Variable Cost X 20

Which of the following is NOT a characteristic of a competitive market.
a. Buyers and sellers are price takers
b. Each firm sells a virtually identical product
c. Entry is limited
d. Each firm chooses an output level that maximizes profits
C. Entry is limited
In a perfectly competitive market,
no one seller can influence the price of the product
Marcia is a fashion designer who runs a small clothing business in a competitive industry. Marcia specializes in making designer dresses. Marcia sells 10 dresses per moth. Her monthly total revenue is \$5,000. The marginal cost of making a dress is \$500. In order to maximize profits, Marcia should
continue making 10 dresses per month
The firm’s shor-run supply curve is its marginal cost curve above…..
Where it intersects with Average Variable Cost Curve
The long-run supply curve for a competitive industry may be upward sloping if
some resources are available only in limited quantities.
If firms are competitive and profit maximizing, the price of a good equals the
marginal cost of production
Which of the following is NOT a characteristic of a monopoly?
a. barriers to entry
b. one seller
d. a product without close substitutes
A benefit of a monopoly is
greater creativity by authors who can copyright their novels
Which of the following is NOT a reason for the existence of a monopoly?
a. sole ownership of key resource
b. patents
d. diseconomies of scale
d. diseconomies of scale

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