Chapter 13

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Chapter 13

Multiple Choice

Identify the letter of the choice that best completes the statement or answers the question.

Economic profit is equal to

a.	total revenue minus the explicit cost of producing goods and services.
b.	total revenue minus the opportunity cost of producing goods and services.
c.	total revenue minus the accounting cost of producing goods and services.
d.	average revenue minus the average cost of producing the last unit of a good or service.

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.
d.	All of the above are correct.

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

Refer to the following information to answer the following questions.

Scenario 13-2

Zach took $500,000 out of the bank and used it to start his new cookie business. The bank account pays 4 percent interest per year. During the first year of his business, Zach sold 12,000 boxes of cookies for $3 per box. Also, during the first year, the cookie business incurred costs that required outlays of money amounting to $14,000.

Refer to Scenario 13-2. Zach's accounting profit for the year was

a.	$-478,000.
b.	$-56,000.
c.	$2,000.
d.	$22,000.

A production function is a relationship between

a.	inputs and quantity of output.
b.	inputs and revenue.
c.	inputs and costs.
d.	inputs and profit.

The figure below depicts a total cost function for a firm that produces cookies. Use the figure to answer the following questions.

Figure 13-2

Refer to Figure 13-2. Which of the following is true of the production function (not pictured) that underlies this total cost function?

(i)	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.

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

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

a.	average cost.
b.	marginal cost.
c.	fixed cost.
d.	variable cost.

Johnny is a sophomore in college and has a 1.5 cumulative grade point average (GPA). Johnny's cumulative GPA will be better next semester if he

(i)	performs better than he did last semester.
(ii)	performs better than his cumulative GPA.
(iii)	gives an average performance.

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

Total cost can be divided into two types. 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.

Refer to the figures below to answer the following questions.

Figure 13-6

10.

Refer to Figure 13-6. Which of the figures represents the total cost curve for a firm?

a.	Figure 1
b.	Figure 2
c.	Figure 3
d.	Figure 4

Use the following information to answer the following questions.

Adrian's Premium Boxing Service subcontracts with a chocolate manufacturer to box premium chocolates for their mail order catalogue business. She rents a small room for $150 a week in the downtown business district that serves as her factory. She can hire workers for $275 a week.

Table 13-2

Number of Workers	Chocolates Produced per Week	Marginal Product of Labor	Cost of Factory	Cost of Workers	Total Cost of Inputs
0	0
1		330	150	275	425
2	630
3		150		825	975
4	890
5	950	60		1,375
6		10			1,800

11.

Refer to Table 13-2. What is the marginal product of the second worker?

a.	110
b.	200
c.	260
d.	300

12.

Refer to Table 13-2. One week, Adrian earns a profit of $125. If her revenue for the week is $1100, how many boxes of chocolate did she produce?

a.	140
b.	330
c.	780
d.	950

Use the following information to answer the following questions.

Teacher's Helper is a small company that has a subcontract to produce instructional materials for disabled children in public school districts. The owner rents several small rooms in an office building in the suburbs for $600 a month and has leased computer equipment that costs $480 a month.

Table 13-3

Output (Instructional Modules per Month)	Fixed Costs	Variable Costs	Total Cost	Average Fixed Cost	Average Variable Cost	Average Total Cost	Marginal Cost
0	1,080
1	1,080	400	1,480				400
2						965	450
3		1,350	2,430
4		1,900			475
5		2,500		216
6			4,280				700
7		4,100
8		5,400		135
9		7,300
10			10,880		980

13.

Refer to Table 13-3. One month, Teacher's Helper produced 18 instructional modules. What was the average fixed cost for that month?

a.	60
b.	108
c.	811
d.	It can't be determined from the information given.

14.

At what level of output will average variable cost equal average total cost?

a.	when marginal cost equals average total cost
b.	for all levels of output in which average variable cost is falling
c.	when marginal cost equals average variable cost
d.	There is not a level of output where this occurs, as long as fixed costs are positive.

15.

Harry Potter is a small street vendor service who contracts to produce and sell molded plastic souvenirs (key chains, commemorative plastic coins, plastic animals, etc.) at small, county carnivals. As owner of the firm, Harry must decide how much of each product to produce. A key element of this decision is

a.	how costs will vary as he changes the level of production.
b.	the cost of bookkeeping services.
c.	the fixed cost of production.
d.	the cost of his selling booth.

16.

Thirsty Thelma owns and operates a small lemonade stand. When Thelma is producing a small quantity of lemonade she has few workers and her equipment is not being fully utilized. Because she can easily put her idle resources to use,

a.	the marginal cost of an extra worker is large.
b.	the marginal cost of one more glass of lemonade is small.
c.	the marginal product of an extra worker is small.
d.	her lemonade stand is likely to be crowded with workers.

17.

One of the most important properties of cost curves is that

a.	for most producers , the average total cost curve never crosses the marginal cost curve.
b.	the average fixed cost curve must eventually rise.
c.	the average total cost curve first rises, then falls with increased output.
d.	the marginal cost curve eventually rises with the quantity of output.

The figure below depicts average total cost functions for a firm that produces automobiles. Use the figure to answer the following questions.

Figure 13-7

18.

Refer to Figure 13-7. This firm experiences diseconomies of scale at what output levels?

a.	output levels above N
b.	output levels between M and N
c.	output levels below M
d.	All of the above are correct, if the firm is operating in the long run.

19.

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 costs fall as output increases.

20.

In the long run, a firm that produces and sells computers 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.

True/False

Indicate whether the sentence or statement is true or false.

21.

Accountants keep track of the money that flows into and out of firms.

22.

Diminishing marginal product exists when the total cost curve becomes flatter as outputs increases.

Short Answer

23.

What are opportunity costs? How do explicit and implicit costs relate to opportunity costs?

24.

What effect, if any, does diminishing marginal product have on the shape of the marginal cost curve?

25.

Bob Edwards owns a bagel shop. Bob hires an economist who assesses the shape of the bagel shop's average total cost (ATC) curve as a function of the number of bagels produced. The results indicate a U-shaped average total cost curve. Bob's economist explains that ATC is U-shaped for two reasons. The first is the existence of diminishing marginal product, which causes it to rise. What would be the second reason? Assume that the marginal cost curve is linear. (Hint: The second reason relates to average fixed cost)