Economics

1. There are two types of costs associated with production: ____ costs that require monetary payments, and ____ costs that do not.

 A) implicit; accounting  B) accounting; explicit  C) implicit; explicit  D) explicit; implicit

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2. Accounting profits are calculated based upon:

 A) explicit cash receipts and implicit expenditures of cash.  B) actual cash receipts and actual expenditures of cash.  C) implicit cash receipts and actual expenditures of cash.  D) opportunity costs plus explicit costs

3. Economists normally assume that the goal of a firm is to:

 A) sell as many units of output as possible  B) maximize profit  C) sell products at the highest possible price  D) maximize sales revenue

4. An example of an explicit cost of production is:

 A) the cost of foregone labor earnings for an entrepreneur  B) the cost of flour for a baker  C) the foregone rent that could have been earned if land owned by a firm was not used as its parking lot  D) provided by none of the above

 

5. An example of an implicit cost of production is:

 A) the cost of raw materials used to produce bread in a bakery  B) the cost of labor in a factory that assembles DVD players  C) the income an entrepreneur could have earned working for someone else  D) all of the above

6. Cassie produces and sells 400 jars of homemade jelly each month for $3 each. Each month, she pays $200 for jars, $150 for ingredients, and uses her own time, with an opportunity cost of $300. Her economic profits each month are:

 A) $550  B) $700  C) $850  D) $900  E) minus $1200

7. Assume Brad worked as a contractor for a year and had revenues of $120,000 and explicit cost of $70,000. If he could have been paid $80,000 working for a computer company, his accounting profit as a contractor was ____ and his economic profit was ____.

 A) $50,000; -$10,000  B) $10,000; $50,000  C) $40,000; $50,000  D) $50,000; $40,000

 

 

8. An economist’s measurement of profit differs from an accountant’s in that:

 A) accountants calculate total revenue differently than economists  B) economists do not always include all of the opportunity costs when calculating total production costs  C) accountants do not always include all of the opportunity costs when calculating total production costs  D) economic profits generally exceed accounting profit

9. The production function describes

 A) the relationship between the quantity of inputs utilized and the quantity of output produced  B) how inputs are most profitably used in production  C) the most cost-effective method of combining various inputs in the production process  D) the relationship between a firm’s revenue and its level of production

10. A production function

 A) shows the relationship between a firm’s costs and revenues  B) shows the relationship between production and profits  C) shows the relationship between inputs and the maximum output that can be produced from those inputs  D) shows the relationship between variable inputs and fixed inputs  E) shows the relationship between a worker’s human capital and her average productivity

11. The long-run production period

 A) is a time when all inputs are variable  B) varies in length according to how capital goods are specialized  C) is likely longer for a steel manufacturer than for a retailer who sells watches off a cart at the local mall  D) is characterized by all of the above

12. The short run is that period in which firms

 A) are free to vary all inputs  B) are able to vary some, but not all, inputs  C) can vary inputs, but only by varying all inputs in equal proportion  D) cannot increase production at all

13. The short run is not the same length of time for all firms and industries

 A) entrepreneurs have different tastes and preferences  B) the average product of labor varies across industries  C) the life span of capital and the extent of capital specialization will vary across firms and industries  D) the marginal product of capital begins to diminish at different levels of capital utilization across firms

14. The short run is not the same length of time for all firms and industries because

 A) entrepreneurs have different tastes and preferences  B) the average product of labor varies across industries  C) the life span of capital and the extent of capital specialization will vary across firms and industries  D) the marginal product of capital begins to diminish at different levels of capital utilization across firms

15. Which of the following most accurately describes the long-run period?

 A) The long run is a period of time in which a firm is unable to vary some of its factors of production  B) In the long run, the firm is able to expand output by utilizing additional workers and raw materials, but not physical capital  C) The long run is of sufficient length to allow a firm to alter its plant capacity and all other factors of production.  D) The long run is of sufficient length to allow a firm to transform economic losses into economic profits.  E) Both a. and b. most accurately describes the long-run period.

 

 

 

16. Don Keene promotes boxing matches. He makes $6,500 per fight. Which cost is most relevant to a decision as to whether to promote one more fight?

 A) the total cost of promoting all boxing matches during the year  B) the marginal cost of promoting one additional boxing match  C) the average fixed cost of promoting a boxing match  D) the average total cost of promoting a boxing match  E) the sunk cost of promoting previous boxing matches

17. Fixed costs are best defined as:

 A) costs that do not vary with output  B) costs that vary with output  C) the sum of all marginal costs  D) the change in total cost when one more unit of output is produced  E) costs that decline as output increases

18. The marginal cost of a good is:

 A) the difference between average total cost and average variable cost  B) the addition to total cost from producing one more unit of output  C) decreasing whenever average total cost is decresing  D) always equal to average variable cost when the firm is maximizing profit

19. Which of the following is most likely to be a fixed cost for a business?

 A) payment for raw materials used in manufacturing goods  B) interest payments on a loan used to finance the construction of a building  C) shipping charges for the delivery of products  D) wages paid to temporary workers

20. A firm replaces a machine by hiring 3 hourly production workers instead.

 A) Both its fixed and variable costs will fall  B) Both its fixed and variable cost will rise  C) Its fixed costs will rise and its variable costs will fall  D) Its fixed costs will fall and its variable costs will rise

21. Which of the following is most likely a fixed cost?

 A) Raw materials costs  B) Shipping charges  C) Property insurance premiums  D) Fuel cost for running the factory  E) None of the above

22. In the short run, an expansion of output always causes in an increase in:

 A) TC  B) AFC  C) AVC  D) MC  E) all of the above

23. Total variable costs:

 A) are costs associated with short-run fixed capital  B) are so named because they vary from firm to firm within an industry  C) increase as production increases  D) decrease as production increases

 

 

24. A firm’s average fixed cost when producing 2,000 units of output equals $10. When only 1,000 units of output are produced:

 A) AFC must still equal $10  B) AFC must equal $20  C) AFC must equal $5  D) marginal cost must equal $20  E) marginal cost must equal $10

25. Which of the following cost curves is not generally U-shaped?

 A) AFC  B) AVC  C) ATC  D) MC

26. In the short run, it is impossible for an expansion of output to cause an increase in:

 A) ATC  B) AVC  C) AFC  D) MC

27. Which of the following is true at the output level where diminishing marginal product first set in?

 A) Both marginal product and marginal cost are at a minimum.  B) Both marginal product and marginal cost are at a maximum.  C) Marginal product is at a maximum and marginal cost is at a minimum.  D) Marginal product is at a minimum and marginal cost is at a maximum.

28. The short-run average total cost curve eventually turns upward to form a U shape because:

 A) of diminishing marginal cost  B) of increasing average fixed cost  C) all factors can be varied in the long run  D) of diminishing marginal productivity

29. Which of the following is true in the short run?

 A) MC = ATC at the lowest point of ATC  B) MC = AVC at the lowest point of AVC  C) When AVC is at its minimum point, ATC is falling  D) When ATC is at its minimum point, AVC is rising  E) All of the above are true.

30. When economies of scale exist, an increase in the level of output will lead to:

 A) a decrease in cost per unit  B) an increase in cost per unit  C) a decrease in total cost  D) both a. and c. above

31. Economies of scale:

 A) are the result of a diminishing marginal product  B) pertain to the long run only  C) refer to the increase in output that results from the increased utilization of a single input  D) imply that the average total cost curve will fall continuously as output increases in the short run

 

 

 

 

32. Which of the following best resembles a perfectly competitive market?

 A) a stock market  B) the book publishing industry  C) the steel industry  D) the used car industry

33. Which market structure is characterized by many sellers, ease entry, and homogeneous products?

 A) perfect competition  B) monopolistic competition  C) oligopoly  D) monopoly  E) none of the above

34. Perfect competition is the term used to describe:

 A) an industry in which a few price-taking firms produce identical products  B) an industry in which numerous price-taking firms produce identical products  C) an industry in which firms are price takers and compete for market share by varying the qualitative characteristics of products  D) an industry in which numerous firms are price makers and produce identical products

35. Which of the following most closely resembles a perfectly competitive market?

 A) the airline industry  B) the soft drink industry  C) the wheat market  D) long-distance telephone service

 

36. The perfectly competitive model assumes that:

 A) individual sellers can influence the market price  B) sellers can increase their total revenue by raising prices  C) firms can enter and exit the industry with relative ease  D) firms compete by varying a product’s quality rather than a product’s price

37. A perfectly competitive firm faces a demand curve that is:

 A) horizontal and perfectly inelastic  B) horizontal and perfectly elastic  C) vertical and perfectly inelastic  D) vertical and perfectly elastic

38. Why can’t a firm in a perfectly competitive industry charge a price above the market-clearing price?

 A) Government-imposed price ceilings prevent prices from being raised.  B) Firms in a perfectly competitive industry face significant barriers to entry.  C) Perfectly competitive firms are price searchers.  D) Numerous competitors produce the same product and charge the market price.

39. Which of the following is most likely to be a price taker?

 A) a respected heart surgeon  B) an ice cream shop owner located in Atlanta, Georgia  C) a beachside tourist resort  D) a Kansas wheat farmer

 

 

 

 

 

40. If the market demand curve in a perfectly competitive industry shifts right, the demand curve for each existing firm will:

 A) shift up  B) shift down  C) shift right  D) shift left  E) do both a. and c.

41. A profit-maximizing firm in a perfectly competitive market will always produce a quantity of output that:

 A) minimizes the per-unit cost of production.  B) is expected to maximize total revenue.  C) maximizes the amount by which total revenue exceeds total cost.  D) brings average total cost and price into equality.

42. For a perfectly competitive firm, which of the following is always true?

 A) P=MR only  B) ATC=MR only  C) AR=D only  D) P=MR=D  E) none of the above

43. A perfectly competitive firm seeking to maximize its profits would want to maximize the difference between:

 A) its marginal revenue and its marginal cost.  B) its total revenue and its total cost.  C) its accounting revenue and its accounting cost.  D) its price and its marginal cost.

44. If the market price was $9.50, how many units should the perfectly competitive firm depicted below produce in order to maximize profits? Quantity Total Cost

10 50

11 57

12 66

13 77

14 90

 A) 10  B) 11  C) 12  D) 13  E) 14

45. In the short run, a perfectly competitive firm will maximize profit by producing where:

 A) MC=MR  B) MC=ATC  C) ATC=MR  D) AVC=MC

46. William’s Widget Works, sells in a perfectly competitive market, with an equilibrium price of $12. Its marginal revenue:

 A) is greater than $12.  B) is $12.  C) is less than $12.  D) cannot be determined from the above information.

47. Darlene runs a fruit and vegetable stand in a medium-sized community where there are many such stands. Her weekly total revenue equals $3,500. Her weekly total cost of running the stand equals $3,500, consisting of $2.500 of variable costs and $1,000 of fixed costs. An economist would likely advise Darlene to:

 A) shut down as quickly as possible because the stand is generating losses.  B) keep the stand open because it is generating a normal profit.  C) keep the stand open for a while longer because she is covering all of her variable cost and some of her fixed costs.  D) keep the stand open for a while longer because she is covering all of her fixed costs and some of her variable costs.  E) shut down as quickly as possible because the stand is generating no economic profit.

48. In long run equilibrium, a perfectly competitive firm:

 A) can earn positive economic profits.  B) earns zero economic profits.  C) can earn negative economic profits.  D) can do any of the above.

49. The most socially efficient market structure in the long run is:

 A) perfect competition.  B) monopolistic competition.  C) oligopoly.  D) monopoly.

50. Which of the following is true about the long run operations of perfectly competitive firms?

 A) They produce with productive efficiency.  B) They produce with allocative efficiency.  C) They earn zero economic profits.  D) all of the above.