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Production Costs (1)
Review Questions
ARSC 1432 Microeconomics Co-Seminar
SPRING 2009
1) Economists normally assume that the goal of a firm is to
(i)
sell as much of their product as possible.
(ii)
maximize profit.
(iii)
minimize cost.
a.
(ii) and (iii)
b.
(i) and (iii)
c.
(ii) only
d.
all of the above
2) The amount of money that a firm receives from the sale of its output is called
a.
total revenue.
b.
total gross profit.
c.
total net profit.
d.
net revenue.
3) The amount of money that a firm pays to buy inputs is called
a.
variable cost.
b.
marginal cost.
c.
fixed cost.
d.
total cost.
4) Profit is defined as
a.
net revenue minus depreciation.
b.
average revenue minus average total cost.
c.
marginal revenue minus marginal cost.
d.
total revenue minus total cost.
5) Total revenue equals
a.
total output multiplied by sales price of output.
b.
total output multiplied by profit.
c.
(total output multiplied by sales price) – inventory surplus.
d.
(total output multiplied by sales price) – inventory shortage.
6) Those things that must be forgone to acquire a good are called
a.
competitors.
b.
substitutes.
c.
opportunity costs.
d.
explicit costs.
7) 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 were sold for a price of $95. Total revenue for the XYZ corporation would
be
a.
$30,000.
b.
$28,500.
c.
$26,125.
d.
-$3,875.
8) Opportunity costs are comprised of
a.
explicit costs.
b.
implicit costs.
c.
forgone income.
d.
all of the above.
9) An example of an explicit cost of production would be
a.
the cost of forgone labor earnings for an entrepreneur.
b.
the cost of flour for a baker.
c.
the lost opportunity to invest in other capital markets when the money is invested
in one’s business.
d.
none of the above.
10) Which of the following is an implicit cost?
(i)
A business owner forgoing an opportunity to earn a large salary working for a
Wall Street brokerage firm.
(ii)
Interest on debt
(iii)
Uncollected revenue.
a.
(ii) and (iii)
b.
(i) and (iii)
c.
(i) only
d.
All of the above.
11) Economists are primarily interested in
a.
the marginal cost of production in a firm.
b.
the accounting profits generated by a firm.
c.
how firms make production and pricing decisions.
d.
the value of a firm as manifest in stock price.
12) Accountants are primarily interested in the
a. stock of assets of firms.
b. marginal costs of production of firms.
c. taxes due on capital assets of firms.
d.
flow of money into and out of firms.
13) Assuming John owns a shoe-shine business, his accountant most likely includes which of
the following costs on his financial statements?
a.
cost of shoe polish
b.
dividends John’s money was earning in the stock market before John sold his
stock and bought a shoe-shine booth
c.
wages John could earn washing windows
d.
all of the above
14) An important implicit cost of almost every business is
a.
the cost of accounting services.
b.
the cost of compliance with government regulation.
c.
the opportunity cost of financial capital that has been invested in the business.
d.
the cost of debt.
Use the following information to answer questions 15 and 16.
Joe wants to start his own business. The business he wants to start will require that he purchase a
factory that costs $300,000. He is planning to use $100,000 of his own money, and borrow an
additional $200,000 to finance the factory purchase. Assume the relevant interest rate is 10
percent.
15) What is the explicit cost of purchasing the factory for the first year of operation?
a.
$10,000
b.
$20,000
c.
$30,000
d.
$40,000
16) What is the opportunity cost of purchasing the factory for the first year of operation?
a.
$10,000
b.
$20,000
c.
$30,000
d.
$40,000
17) Economic profit is equal to
a.
total revenue minus the opportunity cost of producing goods and services.
b.
total revenue minus the accounting cost of producing goods and services.
c.
total revenue minus the explicit cost of producing goods and services.
d.
average revenue minus the average cost of producing the last unit of a good or
service.
18) Accounting 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.
average revenue minus the average cost of producing the last unit of a good or
service.
d.
marginal revenue minus marginal cost.
19) A production function is a relationship between
a.
inputs and revenue.
b.
inputs and costs.
c.
inputs and profit.
d.
inputs and quantity of output.
20) The marginal product of labor is equal to the
a.
increase in labor necessary to generate a one-unit increase in output.
b.
increase in output obtained from a one-unit increase in labor.
c.
incremental profit associated with a one-unit increase in labor.
d.
incremental cost associated with a one-unit increase in labor.
21) The marginal product of labor can be defined as (where Δ denotes "change")
a.
Δoutput/Δlabor.
b.
Δlabor/Δoutput.
c.
Δprofit/Δlabor.
d.
Δlabor/Δtotal cost.
22) One would expect to observe diminishing marginal product of labor when
a.
workers are discouraged about the lack of help from other workers.
b.
crowded office space reduces the productivity of new workers.
c.
union workers are told to reduce their work effort in preparation for a new round
of collective bargaining talks.
d.
only new workers are trained in using the most productive capital.
The figure below depicts a production function for a firm that produces cookies. Use the figure
to answer questions 23 through 25.
23) As the number of workers increases,
a.
marginal product increases, but at a decreasing rate.
b.
total output increases, but at a decreasing rate.
c.
marginal product increases.
d.
total output decreases.
24) With regard to cookie production, the figure implies
a.
decreasing cost of cookie production.
b.
increasing marginal product of workers.
c.
diminishing marginal product of workers.
d.
diminishing marginal cost of cookie production.
25) The slope of the total product curve reveals information about the
a.
average product of workers.
b.
marginal product of workers.
c.
total product of workers.
d.
fixed product of workers.
26) Which of the following statements about a production function is true?
a.
The slope of the production function measures the average product of labor.
b.
The slope of the production function measures average total cost.
c.
The slope of a ray from the origin to a point on the production function measures
the marginal product of labor.
d.
The slope of the production function measures the marginal product of a worker.
27) When a firm is making a profit maximizing production decision, which one of the Ten
Principles of Economics is likely to be most important to their decision?
a.
Governments can sometimes improve market outcomes.
b.
The cost of something is what you give up to get it.
c.
A country's standard of living depends on its ability to produce goods and
services.
d.
Prices rise when the government prints too much money.
The figure below depicts a total cost function for a firm that produces cookies. Use the figure to
answer questions 28 through 31.
28) Which of the following is true of the underlying production function?
(i)
Diminishing marginal product for all levels of input usage.
(ii)
Total output increases, but at a decreasing rate.
(iii)
The slope of the production function decreases as quantity of inputs increase.
a.
(i) only
b.
(ii) and (iii)
c.
(i) and (iii)
d.
all of the above
29) The changing slope of the total cost curve reflects
a.
decreasing marginal product.
b.
increasing marginal product.
c.
decreasing average cost.
d.
increasing fixed cost.
30) Which of the statements below best captures information about the underlying production
function?
a.
Output increases at an increasing rate with additional units of input.
b.
Output increases at a decreasing rate with additional units of input.
c.
Output decreases at a decreasing rate with additional units of input.
d.
Output decreases at an increasing rate with additional units of input.
31) Which of the statements below is most consistent with the shape of the total cost curve?
a.
Producing additional cookies is equally costly, regardless of how many cookies
are already being produced.
b.
Producing additional cookies becomes increasingly costly only when the number
of cookies already being produced is large.
c.
Producing an additional cookie is always more costly than producing the previous
cookie.
d.
Total production of cookies decreases with additional units of input.