question
Explicit Costs-
answer
Money actually paid out for the use of inputs
(resources)
(resources)
question
Implicit Costs-
answer
The cost of inputs for which there is no direct
money payment
money payment
question
Short Run (in production)-
answer
A time horizon during which at
least one of the firm's inputs cannot be changed (usually
capital, K)
least one of the firm's inputs cannot be changed (usually
capital, K)
question
Long Run (in production)-
answer
A time horizon long enough to
vary all of its inputs
vary all of its inputs
question
Fixed Inputs-
answer
cannot change with a given time frame (usually
capital, K)
capital, K)
question
Variable Inputs-
answer
can change within any time frame (usually
labor, L)
labor, L)
question
Which of the following items is most likely to be an implicit cost of production?
A. the "competitive rate" salary the owner of the business pays herself for services
provided
B. property taxes on a building owned by the firm
C. rental payments for a building utilized by the company and rented from another
party
D. the interest income foregone on the equity capital invested by owners
E. none of the above
A. the "competitive rate" salary the owner of the business pays herself for services
provided
B. property taxes on a building owned by the firm
C. rental payments for a building utilized by the company and rented from another
party
D. the interest income foregone on the equity capital invested by owners
E. none of the above
answer
D
question
Anne Teek works full time as the manager of her used furniture store in which she has
invested $40,000. Last year, her total revenues were $90,000 and her costs were $60,000
for merchandise, gas, electricity, and other explicit-cost items. Ms. Teek pays herself a
"competitive" salary of $30,000 per year. An economist would consider her profits for
the year to be
A. -$40,000.
B. $0.
C. $0 minus the opportunity cost of the $40,000 of capital invested in the store.
D. $30,000.
E. none of the above.
invested $40,000. Last year, her total revenues were $90,000 and her costs were $60,000
for merchandise, gas, electricity, and other explicit-cost items. Ms. Teek pays herself a
"competitive" salary of $30,000 per year. An economist would consider her profits for
the year to be
A. -$40,000.
B. $0.
C. $0 minus the opportunity cost of the $40,000 of capital invested in the store.
D. $30,000.
E. none of the above.
answer
C
question
During the short-run period of the production process, a firm will be
A. unable to vary any of its factors of production.
B. able to vary some of its factors of production.
C. able to vary all of its factors of production.
D. able to vary the size of its plant.
E. none of the above.
A. unable to vary any of its factors of production.
B. able to vary some of its factors of production.
C. able to vary all of its factors of production.
D. able to vary the size of its plant.
E. none of the above.
answer
B
question
The long run is a period of
A. at least one year.
B. sufficient length to allow a firm to expand output by hiring additional workers.
C. sufficient length to allow a firm to alter its plant size and capacity and all other
factors of production.
D. sufficient length to allow a firm to transform economic losses into economic
profits by hiring better workers.
E. none of the above.
A. at least one year.
B. sufficient length to allow a firm to expand output by hiring additional workers.
C. sufficient length to allow a firm to alter its plant size and capacity and all other
factors of production.
D. sufficient length to allow a firm to transform economic losses into economic
profits by hiring better workers.
E. none of the above.
answer
C
question
Fixed costs are best defined as
A. costs that do not vary with output.
B. costs that are at a minimum when output approaches the firm's capacity.
C. the amount that one more unit of output adds to total costs.
D. costs that decline as output increases.
E. none of the above.
A. costs that do not vary with output.
B. costs that are at a minimum when output approaches the firm's capacity.
C. the amount that one more unit of output adds to total costs.
D. costs that decline as output increases.
E. none of the above.
answer
A
question
Which of the following is most likely to be a fixed cost for a business?
A. expenditures on low-skill labor
B. shipping charges for the delivery of products
C. managerial salaries
D. property taxes on the firm's buildings
E. none of the above.
A. expenditures on low-skill labor
B. shipping charges for the delivery of products
C. managerial salaries
D. property taxes on the firm's buildings
E. none of the above.
answer
D
question
Which of the following will become smaller and smaller as the firm expands output?
A. average total cost
B. average fixed cost
C. marginal cost
D. total fixed cost
E. none of the above.
A. average total cost
B. average fixed cost
C. marginal cost
D. total fixed cost
E. none of the above.
answer
B
question
Mr. Hudson notes that if he produces 10 pairs of shoes per day, his average fixed cost
(AFC) is $14 and his marginal cost is $8; if he produces 20 pairs of shoes per day, his
MC is $15. What is his AFC when output is 20 pairs of shoes per day?
A. $5
B. $7
C. $8
D. $15
E. none of the above.
(AFC) is $14 and his marginal cost is $8; if he produces 20 pairs of shoes per day, his
MC is $15. What is his AFC when output is 20 pairs of shoes per day?
A. $5
B. $7
C. $8
D. $15
E. none of the above.
answer
B
question
The marginal cost of a good is
A. lower for competitive firms than for monopolists.
B. the cost of an additional unit.
C. equal to fixed cost at high output levels.
D. equal to variable cost when the firm is maximizing profit.
E. none of the above.
A. lower for competitive firms than for monopolists.
B. the cost of an additional unit.
C. equal to fixed cost at high output levels.
D. equal to variable cost when the firm is maximizing profit.
E. none of the above.
answer
B
question
Which of the following must be true if average variable costs are decreasing?
A. Average fixed cost exceeds average total cost.
B. Marginal cost exceeds average variable cost.
C. Marginal cost is less than average variable cost.
D. Marginal cost is less than average total cost.
E. none of the above.
A. Average fixed cost exceeds average total cost.
B. Marginal cost exceeds average variable cost.
C. Marginal cost is less than average variable cost.
D. Marginal cost is less than average total cost.
E. none of the above.
answer
C
question
In the short run, if average variable costs equal $60, average total costs equal $70, and
output equals 100, the total fixed costs should equal
A. $10.
B. $1,000.
C. $5,000.
D. $13,000.
E. none of the above.
output equals 100, the total fixed costs should equal
A. $10.
B. $1,000.
C. $5,000.
D. $13,000.
E. none of the above.
answer
B
question
Which of the following would cause a firm's cost curves to shift upward?
A. a reduction in resource prices
B. a decrease in taxes
C. an improvement in technology
D. an increase in government regulations
E. none of the above.
A. a reduction in resource prices
B. a decrease in taxes
C. an improvement in technology
D. an increase in government regulations
E. none of the above.
answer
D
question
In 1632, the Virginia Legislature decreed that all love apples must be sold for $1 per
bushel (no more, no less). At the time, Mr. McKintoch had 1,000 bushels of love apples
ready for harvesting. His sunk costs were $1,100, and his total costs (including sunk
costs) would have been $1,800 if he harvested. If McKintoch decided not to harvest
because he did not think he could cover his total costs, he
A. made the wrong decision, but for the right reason.
B. made the wrong decision; the sunk cost component of total cost should not have
affected his decision to harvest.
C. made the correct decision and considered the correct decision-making criteria; a
firm should never sell for less than its costs.
D. One cannot determine from the data whether he should have harvested the love
apples.
E. none of the above.
bushel (no more, no less). At the time, Mr. McKintoch had 1,000 bushels of love apples
ready for harvesting. His sunk costs were $1,100, and his total costs (including sunk
costs) would have been $1,800 if he harvested. If McKintoch decided not to harvest
because he did not think he could cover his total costs, he
A. made the wrong decision, but for the right reason.
B. made the wrong decision; the sunk cost component of total cost should not have
affected his decision to harvest.
C. made the correct decision and considered the correct decision-making criteria; a
firm should never sell for less than its costs.
D. One cannot determine from the data whether he should have harvested the love
apples.
E. none of the above.
answer
B
question
Which one of the following decisions most clearly reflects a lack of understanding of
the concept of sunk costs?
A. You pay to have your car towed back to the repair shop because it was not fixed
properly the first time.
B. You decide to get a master's degree because you cannot find a job in the field in
which you majored.
C. You decide to purchase a piece of machinery for your business that will eliminate
three employees' positions.
D. You study eight hours for a final exam even though there is no way now that you
can pass the course.
E. none of the above.
the concept of sunk costs?
A. You pay to have your car towed back to the repair shop because it was not fixed
properly the first time.
B. You decide to get a master's degree because you cannot find a job in the field in
which you majored.
C. You decide to purchase a piece of machinery for your business that will eliminate
three employees' positions.
D. You study eight hours for a final exam even though there is no way now that you
can pass the course.
E. none of the above.
answer
D
question
If you paid $100 for a truckload of cabbage on Monday, how much should you be
willing to sell it for on Friday, the day before it spoils?
A. $100
B. $100 plus normal accounting profit
C. $50 because it has lost value since Monday
D. whatever you can get for it
E. none of the above.
willing to sell it for on Friday, the day before it spoils?
A. $100
B. $100 plus normal accounting profit
C. $50 because it has lost value since Monday
D. whatever you can get for it
E. none of the above.
answer
D
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