Midterm Exam, Chapter 7

Which of the following is most likely to be an implicit cost for Company X?

a) forgone rent from the building owned and used by Company X
b) rental payments on IBM equipment
c) payments for raw materials purchased from Company Y
d) transportation costs paid to a nearby trucking firm

a

Normal profit is:

a) determined by subtracting implicit costs from total revenue.
b) determined by subtracting explicit costs from total revenue.
c) the return to the entrepreneur when economic profits are zero.
d) the average profitability of an industry over the preceding 10 years.

c

Suppose that a business incurred implicit costs of $500,000 and explicit costs of $5 million in a specific year. If the firm sold 100,000 units of its output at $50 per unit, its accounting:

a) profits were $100,000 and its economic profits were zero.
b) losses were $500,000 and its economic losses were zero.
c) profits were $500,000 and its economic profits were $1 million.
d) profits were zero and its economic losses were $500,000.

d

The following is cost information for the Creamy Crisp Donut Company:

Entrepreneur’s potential earnings as a salaried worker = $50,000

Annual lease on building = $22,000

Annual revenue from operations = $380,000

Payments to workers = $120,000

Utilities (electricity, water, disposal) costs = $8,000

Value of entrepreneur’s talent in the next best entrepreneurial activity = $80,000

Entrepreneur’s forgone interest on personal funds used to finance the business = $6,000

Refer to the above data. Creamy Crisp:

a) has lower implicit costs, including a normal profit, than its explicit costs.
b) is earning a normal profit but not an economic profit.
c) is earning an economic profit.
d) is suffering an economic loss, when implicit costs are considered.

c

The basic characteristic of the short run is that:

a) barriers to entry prevent new firms from entering the industry.
b) the firm does not have sufficient time to change the size of its plant.
c) the firm does not have sufficient time to cut its rate of output to zero.
d) a firm does not have sufficient time to change the amounts of any of the resources it employs

b

The long run is characterized by:

a) the relevance of the law of diminishing returns.
b) at least one fixed input.
c) insufficient time for firms to enter or leave the industry.
d) the ability of the firm to change its plant size.

d

The law of diminishing returns describes the:

a) relationship between total costs and total revenues.
b) profit-maximizing position of a firm.
c) relationship between resource inputs and product outputs in the short run.
d) relationship between resource inputs and product outputs in the long run.

c

When total product is increasing at an increasing rate, marginal product is:

a) positive and increasing.
b) positive and decreasing.
c) constant.
d) negative.

a

If you owned a small farm, which of the following would most likely be a fixed cost?

a) harvest labor
b) hail insurance
c) fertilizer
d) seed

b

If you operated a small bakery, which of the following would be a variable cost in the short run?

a) baking ovens
b) interest on business loans
c) annual lease payment for use of the building
d) baking supplies (flour, salt, etc.)

d

For most producing firms:

a) marginal cost rises as output is carried to a certain level, and then begins to decline.
b) total costs rise as output is carried to a certain level, and then begin to decline.
c) average total costs decline as output is carried to a certain level, and then begin to rise.
d) average total costs rise as output is carried to a certain level, and then begin to decline

c

Which of the following is correct as it relates to cost curves?

a) Average variable cost intersects marginal cost at the latter’s minimum point.
b) Marginal cost intersects average total cost at the latter’s minimum point.
c) Average fixed cost intersects marginal cost at the latter’s minimum point.
d) Marginal cost intersects average fixed cost at the latter’s minimum point

b

Other things equal, if the wage rates paid to a firm’s labor inputs were to rise, we would expect the:

a) AFC, AVC, ATC, and MC curves all to rise.
b) AVC, ATC, and MC curves all to rise.
c) AFC and ATC curves to fall.
d) MP curve to fall.

b

If an industry’s long-run average total cost curve has an extended range of constant returns to scale, this implies that:

a) technology precludes both economies and diseconomies of scale.
b) the industry will be a natural monopoly.
c) both relatively small and relatively large firms can be viable in the industry.
d) the industry will be comprised of a very large number of small firms.

c

If a firm increases all of its inputs by 10 percent and its output increases by 15 percent, then:

a) it is encountering diseconomies of scale.
b) it is encountering economies of scale.
c) the law of diminishing returns is taking hold.
d) the firm’s long-run ATC curve will be rising.

b

Economic profits are equal to:

a) Total revenues minus fixed costs
b) Total revenues minus the costs of raw materials
c) Total revenues minus the opportunity costs of all inputs
d) Gross profit minus selling and operating expenses

c

Normal profits are:

a) The profits reported by accountants on a firm’s annual financial statement
b) Identical to economic profits
c) Determined by subtracting total costs from total revenues
d) Considered an implicit cost by economists

d

The main difference between the short run and the long run is that:

a) Firms earn zero profits in the long run
b) The long run always refers to a time period of one year or longer
c) In the short run, some inputs are fixed
d) In the long run, all inputs are fixed

c

Which statement best illustrates the law of diminishing returns?

a) The average total cost of the last unit of output produced is less than the average total cost of the preceding unit of output
b) The marginal product of the last unit of a resource used is less than the marginal product of the preceding unit of resource
c) The average product of the last unit of a resource used is less than the average product of the preceding unit of resource
d) The marginal cost of the last unit of output produced is less than the marginal cost of the preceding unit of output

b

Over the range of positive, but diminishing, marginal returns for an input, the total product curve:

a) Falls
b) Rises at a constant rate
c) Rises at a decreasing rate
d) Rises at an increasing rate

c

Assume a firm is operating at minimum average total cost in the short run. If there is a decrease in output it follows that:

a) Marginal cost increases
b) Average fixed cost increases
c) Average total costs decrease
d) Average variable cost increases

b

If the short-run average variable costs of production for a firm are rising, then this indicates that:

a) Average total costs are at a maximum
b) Average fixed costs are constant
c) Marginal costs are above average variable costs
d) Average variable costs are below average fixed costs

c

The firm’s short-run marginal-cost curve is increasing when:

a) Marginal product is increasing
b) Marginal product is decreasing
c) Total fixed cost is increasing
d) Average fixed cost is decreasing

b

If a more efficient technology was discovered by a firm, there would be:

a) An upward shift in the AVC curve
b) An upward shift in the AFC curve
c) A downward shift in the AFC curve
d) A downward shift in the MC curve

d

If long-run average total cost decreases as output increases, this is due to:

a) Declining average fixed costs
b) The law of diminishing returns
c) Economies of scale
d) Externalities

c

When a firm doubles its inputs and finds that its output has more than doubled, this is known as:

a) Economies of scale
b) Constant returns to scale
c) Diseconomies of scale
d) A violation of the law of diminishing returns

a

Which statement is not correct?

a) The real cost of producing X is the amounts of products Y, Z, etc., which might have been produced with the resources devoted to X
b) Diseconomies of scale arise primarily from the difficulties in managing and coordinating a large-scale business enterprise
c) The law of diminishing returns accounts for the fact that the long-run average total cost curve is U-shaped
d) Average fixed costs diminish so long as output increases

c