Econ Ch 13

Economists normally assume that the goal of a firm is to
(i) sell as much of their product as possible.
(ii) set the price of their product as high as possible.
(iii) maximize profit.

(iii) only

The amount of money that a firm receives from the sale of its output is called

total revenue.

The amount of money that a firm pays to buy inputs is called

total cost.

Profit is defined as

total revenue minus total cost.

Which of the following can be added to profit to obtain total revenue?

total cost

Economists normally assume that the goal of a firm is to
(i) make profit as large as possible even if it means reducing output.
(ii) make profit as large as possible even if it means incurring a higher total cost.
(iii) make revenue as large as possible.

(i) and (ii)

Total revenue equals

total output multiplied by price per unit of output.

Those things that must be forgone to acquire a good are called

opportunity costs.

XYZ corporation produced 300 units of output but sold only 275 of the units it produced. The average cost of production for each unit of output produced was $100. Each of the 275 units sold was sold for a price of $95. Total revenue for the XYZ corporation would be

$26,125.

Explicit costs

require an outlay of money by the firm.

An example of an explicit cost of production would be

the cost of flour for a baker.

An example of an implicit cost of production would be

the income an entrepreneur could have earned working for someone else.

Accountants are primarily interested in the

flow of money into and out of firms

John owns a shoe-shine business. His accountant most likely includes which of the following costs on his financial statements?

the cost of shoe polish

Economic profit is equal to

total revenue minus the opportunity cost of producing goods and services

Accounting profit is equal to

total revenue minus the explicit cost of producing goods and services

Economic profit is equal to
(i) total revenue – (explicit costs + implicit costs).
(ii) total revenue – opportunity costs.
(iii) accounting profit + implicit costs.

(i) and (ii)

Accounting profit is equal to
(i) total revenue – implicit costs.
(ii) total revenue – opportunity costs.
(iii) economic profit + implicit costs.

(iii) only

Economic profit

will never exceed accounting profit.

To an economist, it is conceivable that the objective that motivates an individual entrepreneur to start a business arises from

a. an innate love for the type of business that he or she starts. b. a desire to earn a profit. c. an altruistic desire to provide the world with a good product. All of the above are correct.

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?

The cost of something is what you give up to get it

A production function is a relationship between

inputs and quantity of output.

The marginal product of labor is equal to the

increase in output obtained from a one unit increase in labor.

The marginal product of labor can be defined as

change in output/change in labor.

One would expect to observe diminishing marginal product of labor when

crowded office space reduces the productivity of new workers.

When adding another unit of labor leads to an increase in output that is smaller than increases in output that resulted from adding previous units of labor, we have the property of

diminishing marginal product.

(Refer to the figure) As the number of workers increases

total output increases, but at a decreasing rate.

(refer to the figure)With regard to cookie production, the figure implies

diminishing marginal product of workers

(refer to the figure)Which of the following statements about a production function is correct for a firm that uses labor to produce output?

The production function depicts the relationship between the quantity of labor and the quantity of output.

Which of the following is true of the production function (not pictured) that underlies this total cost function?
(ii) Total output increases as the quantity of inputs increases, but at a decreasing rate.
(ii) Marginal product is diminishing for all levels of input usage.
(iii) The slope of the production function decreases as the quantity of inputs increases

All of the above are correct.

The changing slope of the total cost curve reflects

decreasing marginal product.

Which of the following statements best captures the nature of the underlying production function?

Producing an additional cookie is always more costly than producing the previous cookie.

Which of these assumptions is often realistic for a firm in the short run?

The firm can vary the number of workers it employs, but not the size of its factory.

Assume a certain firm regards the number of workers it employs as variable, and that it regards the size of its factory as fixed. This assumption is often realistic

in the short run, but not in the long run.

The marginal product of an input in the production process is the increase in

quantity of output obtained from an additional unit of that input.

A total-cost curve shows the relationship between the

the quantity of output produced and the total cost of production.

Which of the following costs do not vary with the amount of output a firm produces?

fixed costs

An example of a fixed cost would be
(i) raw materials supplied at a government -regulated price.
(ii) rent paid on a factory.
(iii) machine maintenance.

(i) and (ii)

Fixed costs can be defined as costs that

are incurred even if nothing is produced.

Suppose Jan is starting up a small lemonade stand business. Variable costs for Jan’s lemonade stand would include the cost of

lemonade mix.

If a firm produces nothing, which of the following costs will be zero?

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,

the size of the factory is fixed.

The cost of producing the typical unit of output is the firm’

average total cost.

Average total cost is equal to

total cost/output.

The amount by which total cost rises when the firm produces one additional unit of output is called

marginal cost.

The cost of producing an additional unit of output is the firm’s

marginal cost.

Variable cost divided by quantity produced is

None of the above are correct.

Average total cost tells us the

cost of a typical unit of output, if total cost is divided evenly over all the units produced.

Marginal cost tells us the

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

Average total cost will be

U-shaped.

Average fixed cost will be

always falling

If marginal cost is rising,

marginal product must be falling.

Diminishing marginal product suggests that the marginal

product of an extra worker is less than the previous worker’s marginal product.

Diminishing marginal product suggests that

marginal cost is upward sloping

The average fixed cost curve

always declines with increased levels of output

Average total cost is very high when a small amount of output is produced because

average fixed cost is high

The efficient scale of the firm is the quantity of output tha

minimizes average total cost.

When marginal cost is less than average total cost

average total cost is falling.

When marginal cost exceeds average total cost,

average total cost must be rising

Average total cost is increasing whenever

marginal cost is greater than average total cost.

Marginal cost is equal to average total cost when

average total cost is at its minimum

The marginal cost curve crosses the average total cost curve at

All of the above are correct

If marginal cost is below average total cost, then average total cost

is falling

At all levels of production beyond the point where the marginal cost curve crosses the average variable cost curve, average variable cost

rises.

(Refer to figure) Which of the curves is most likely to represent average total cost?

B

(Refer to figure) Which of the curves is most likely to represent average variable cost?

C

(Refer to figure) Which of the curves is most likely to represent marginal cost?

A

This particular firm is necessarily experiencing increasing marginal product when curve

A is Falling

This particular firm is necessarily experiencing diminishing marginal product when curve

All of the above are correct.

Total cost can be divided into two types. Those two types are

fixed costs and variable costs.

Some costs do not vary with the quantity of output produced. Those costs are called

fixed costs.

Which of the following statements about costs is correct?

As the quantity of output increases, marginal cost eventually rises.

The firm’s efficient scale is the quantity of output that minimizes

average total cost.

The average fixed cost of producing five widgets is

$2.00.

The average variable cost of producing four widgets is

$2.50

The marginal cost of producing the sixth widget is

$6.00

What is the variable cost of producing zero widgets?

$0

What is the marginal cost of producing the first widget?

$1.00

What is the variable cost of producing five widgets?

$15.00

Harry’s Hotdogs is a small street vendor business owned by Harry Huggins. Harry is trying to get a better understanding of his costs by categorizing them as fixed or variable. Which of the following costs are most likely

the cost of bookkeeping services

When a firm is able to put idle equipment to use by hiring another worker,

variable costs will rise.

When a firm is operating at an efficient scale,

average total cost is minimized.

Which of the following must always be true as the quantity of output increases?

Average fixed cost must fall.

Which of the following statements is false?

If marginal cost is rising, then average variable cost must be rising.

When marginal cost is rising, average variable cost

could be rising or falling.

One of the most important properties of cost curves is that

the marginal cost curve eventually rises with the quantity of output.

When a factory is operating in the short run,

it cannot adjust the quantity of fixed inputs.

In the long run,

inputs that were fixed in the short run become variable.