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Microeconomics Ch. 13

John owns a shoe-shine business. His accountant most likely includes which of the following costs on his financial statements?
a. wages John could earn washing windows
b. dividends John’s money was earning in the stock market before John sold his stock and bought a shoe-shine booth
c. the cost of shoe polish
d. both b and c are correct
c. the cost of shoe polish
Joe wants to start his own business. The business he wants to start will require that he purchase a factory that costs $400,000. Joe currently has $500,000 in the bank earning 3 percent interest per year.

Suppose Joe purchases the factory using $200,000 of his own money and $200,000 borrowed from a bank at an interest rate of 6 percent. What is Joe’s annual opportunity cost of purchasing the factory?
a. $3,000
b. $6,000
c. $15,000
d. $18,000

d. $18,000
When a firm is making a profit-maximizing production decision, which of the following principles of economics is likely to be most important to the firm’s decision?
a. The cost of something is what you give up to get it.
b. A country’s standard of living depends on its ability to produce goods and services.
c. Prices rise when the government prints too much money.
d. Governments can sometimes improve market outcomes.
a. The cost of something is what you give up to get it.
Economists normally assume that the goal of a firm is to
a. maximize its total revenue.
b. maximize its profit.
c. minimize its explicit costs.
d. minimize its total cost.
b. maximize its profit.
Which of the following expressions is correct?
a. accounting profit = economic profit + implicit costs
b. accounting profit = total revenue – implicit costs
c. economic profit = accounting profit + explicit costs
d. economic profit = total revenue – implicit costs
a. accounting profit = economic profit + implicit costs
Zach took $400,000 out of the bank and used it to start his new cookie business. The bank account pays 3 percent interest per year. During the first year of his business, Zach sold 6,000 boxes of cookies for $2.50 per box. Also, during the first year, the cookie business incurred costs that required outlays of money amounting to $9,000.

Zach’s economic profit for the year was
a. $-506,000.
b. $-6,000.
c. $3,000.
d. $6,000.

b. $-6,000
Jane decides to open her own business and earns $50,000 in accounting profit the first year. When deciding to open her own business she turned down three separate job offers with annual salaries of $30,000, $40,000, and $45,000. What is Jane’s economic profit from running her own business?
a. $-65,000
b. $5,000
c. $10,000
d. $20,000
b. $5,000
Suppose that for a particular business there are no implicit opportunity costs. Then
a. accounting profit will be greater than economic profit.
b. accounting profit will be the same as economic profit.
c. accounting profit will be less than economic profit.
d. the relationship between accounting profit and economic profit cannot be determined since the amount of explicit opportunity costs is not given.
b. accounting profit will be the same as economic profit.
Which of these assumptions is often realistic for a firm in the short run?
a. The firm can vary both the size of its factory and the number of workers it employs.
b. The firm can vary the size of its factory, but not the number of workers it employs.
c. The firm can vary the number of workers it employs, but not the size of its factory.
d. The firm can vary neither the size of its factory nor the number of workers it employs.
c. The firm can vary the number of workers it employs, but not the size of its factory.
For a firm, the production function represents the relationship between
a. implicit costs and explicit costs.
b. quantity of inputs and total cost.
c. quantity of inputs and quantity of output.
d. quantity of output and total cost.
c. quantity of inputs and quantity of output.
When a firm’s only variable input is labor, then the slope of the production function measures the
a. quantity of labor..
b. quantity of output.
c. total cost.
d. marginal product of labor.
d. marginal product of labor.
Leet L represent the number of workers hired by a firm and let Q represent that firm’s quantity of output. Assume two points on the firm’s production function are (L= 112, Q=122) and (L=13, Q= 132). Then the marginal product of the 13th worker is
a. 8 units of output.
b. 10 units of output.
c. 122 units of output.
d. 132 units of output.
b. 10 units of output.
A total-cost curve shows the relationship between the
a. quantity of an input used and the total cost of production.
b. quantity of output produced and the total cost of production.
c. total cost of production and profit.
d. total cost of production and total revenue.
b. quantity of output produced and the total cost of production.
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
d. variable cost
One assumption that distinguishes short-run cost analysis from long-run cost analysis for a profit–maximizing firm is that in the short run,
a. output is not variable.
b. the number of workers used to produce the firm”s product is fixed.
c. the size of the factory is fixed.
d. there are no fixed costs.
c. the size of the factory is fixed.
Variable cost divided by change in quantity produced is
a. average variable cost.
b. marginal cost.
c. average total cost.
d. None of the above is correct.
d. None of the above is correct.
Diminishing marginal product suggests that the marginal
a. cost of an extra worker is unchanged.
b. cost of an extra worker is less than the previous worker’s marginal cost.
c. product of an extra worker is less than the previous worker’s marginal product.
d. product of an extra worker is greater than the previous worker’s marginal product.
c. product of an extra worker is less than the previous worker’s marginal product.
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.
d. marginal post is greater than average total cost.
Johnny is a sophomore in college and has a 1.5 cumulative grade point average (GPA). Johnny’s cumulative GGPA will fall even further next semester if he performs worse than
(i) his cumulative GPA.
(ii) he ever performed before.
(iii) he did last semester.

a. (i) and (ii)
b. (i) and (iii)
c. (ii) and (iii)
d. All of the above are correct.

a. (i) and (ii)
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.
d. average total cost is at its minimum.
At all levels of production beyond the point where the marginal cost curve crosses the average variable cost curve, average variable cost
a. rises.
b. remains unaffected.
c. falls.
d. All of the above are possible depending on the shape of the marginal cost curve.
a. rises.
Total cost can be divided into two types of costs. Those two types are
a. fixed costs and variable costs.
b. fixed costs and marginal costs.
c. variable costs and marginal costs.
d. average costs and marginal costs.
a. fixed costs and variable costs.
Average total cost (ATC)) is calculated as follows:
a. ATC= (change in total cost)/ (change in quantity of output).
b. ATC= (change in total cost)/(change in quantity of input).
c. ATC= total cost/ quantity of output.
d. ATC= total cost/ quantity of input.
c. ATC= total cost/ quantity of output.
Implicit costs
a. do not require an outlay of money by the firm.
b. do not enter into the economist’s measurement of a firm’s profit.
c. are also known as variable costs.
d. are not part of an economist’s measurement of opportunity cost.
a. do not require any outlay of money by the firm.
A certain firm produces and sells staplers. Last year, it produced 7,000 staplers and sold each stapler for $6. In producing the 7,000 staplers, it incurred variable costs of $28,000 and a total cost of $45,,000.

In producing the 7,000 staplers, the firm’s average total cost was
a. $5.00
b. $5.42
c. $6.21
d. $6.43

d. $6.43
Which of the following statements about costs is correct?
a. When marginal cost is less than average total cost, average total cost is rising.
b. The total cost curve is U-shaped.
c. As the quantity of output increases, marginal cost eventually rises.
d. All of the above are correct.
c. As the quantity of output increases, marginal cost eventually rises.
Which of the following statements is false?
a. The marginal cost of the fifth unit of output equals the total cost of five units minus the total cost of four units.
b. The total variable cost of seven units equals the average variable cost of seven units times seven.
c. If marginal cost is rising, then average variable cost must be rising.
d. The marginal cost of the fifth unit of output equals the total variable cost of five units minus the total variable cost of four units.
c. If marginal cost is rising, then average variable cost must be rising.
For Firm A, 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
a. $4
If marginal cost is greater than average total cost then
a. profits are increasing.
b. economies of scale are becoming greater.
c. average total cost remains constant.
d. average total cost is increasing.
d. average total cost is increasing.
If Franco’s Pizza Parlor knows that the marginal cost of the 5000th pizza is $3.50 and that the average total cost of making 499 pizzas is $3.30, then
a. average costs are rising at Q= 500.
b. average costs are falling at Q=500.
c. total costs are falling at Q= 500.
d. average variable costs must be falling.
a. average costs are rising at Q= 500.
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.
b. inputs that were fixed in the short run become variable.
The length of the short run
a. is different for different types of firms.
b.can never exceed 3 years.
c. can never exceed 1 year.
d. is always less than 6 months.
a. is different for different types of firms.
Diseconomies of scale occur when
a. average fixed costs are falling.
b. average fixed costs are constant.
c. long-run average total costs rise as output increases.
d. long-run average total cost fall as output increases.
c. long-run average total costs rise as output increases.
In the long run, a firm that produces and sells computer gets to choose
a. how many workers to hire.
b. the size of its factories.
c. which short-run average-total-cost curve to use.
d. All of the above are correct.
d. All of the above are correct.
In the long run, when marginal cost is above average total cost, the average total cost curve exhibits
a. economies of scale.
b. diseconomies of scale.
c. constant returns to scale.
d. efficient scale.
b. diseconomies of scale.
Since the 1980s, Wal-Mart stores have appeared in almoset every community in America. Wal-Mart buys its good in large quantities and, therefore, at cheaper prices. Wal-Mart also locates its stores where land prices are low, usually outside of the community business district. Many customers shop at Wal-Mart because of low prices. Local retailers, like the neighborhood drug store, often go out of business because they lose customers. This story demonstrates that
a. consumers are boycotting local retailers whose prices are relatively higher.
b. there are diseconomies of scale in retail sales.
c. there are economies of scale in retail sales.
d. there are diminishing returns to producing and selling retail goods.
c. there are economies of scale in retail sales.
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.
b. be horizontal.
The total cost to the firm of producing zero units of output is
a. zero in both the short run and the long run.
b. its fixed cost in the short run and zero in the long run.
c. its fixed cost in both the short run and the long run.
d. its variable cost in both the short run and the long run.
b. its fixed cost in the short run and zero in the long run.

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