Fundamentals of Economics 6th Edition by William Boyes – Test Bank

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Chapter 5—Costs and Profit Maximization

 

MULTIPLE CHOICE

 

  1. Labor, land, and capital used in production are
a. resources.
b. outputs.
c. productivity.
d. technological progress.
e. innovations.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Knowledge

 

  1. The transformation of resources into economic goods and services is called
a. technical efficiency.
b. resource.
c. production.
d. increasing returns.
e. output.

 

 

ANS:  C                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Knowledge

 

  1. Economic goods and services produced by business firms are
a. resources.
b. outputs.
c. innovations.
d. productivity.
e. technological progress.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Knowledge

 

  1. Average total cost is calculated by dividing
a. the change in total cost by the change in the quantity of output.
b. total output by the number of people employed.
c. the change in total output by the change in the number of people employed.
d. total cost by total output.
e. total output by total cost.

 

 

ANS:  D                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Knowledge

 

  1. The average total cost curve indicates that
a. as output rises in the short run, costs decline rapidly.
b. as output rises in the short run, per unit costs initially fall but eventually rise.
c. firms generally operate at a highly inefficient point of production.
d. costs cannot be contained even if businesses employ the proper combination of resources.
e. as more output is produced in the short run, average total costs must increase.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Knowledge

 

  1. Average total cost is
a. the per-unit cost and is derived by dividing total cost by marginal cost.
b. the total unit cost of production.
c. the per-unit cost and is derived by dividing total cost by the quantity of output.
d. just the marginal cost adjusted for the workers’ productivity level.
e. derived by dividing marginal cost by the quantity of output.

 

 

ANS:  C                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Knowledge

 

  1. Marginal cost is calculated by dividing
a. the change in total cost by the change in the quantity of output produced.
b. total output by the number of people employed.
c. the change in total output by the change in the number of people employed.
d. the change in total cost by the change in change in variable cost.
e. total cost by total output.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Knowledge

 

  1. As output rises unit by unit, costs ____ relatively ____ at first, but then ____ more ____.
a. decrease; slowly; increase; rapidly
b. decrease; quickly; increase; slowly
c. rise; slowly; increase; rapidly
d. rise; quickly; increase; slowly
e. rise; quickly; increase; quickly

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Knowledge

 

  1. After hiring three new employees, a manager sees that total output increases. If the manager hires two additional employees and discovers total output has fallen, the result is due to
a. diseconomies of scale.
b. a poor hiring procedure.
c. diminishing marginal returns.
d. the lack of skills of newest employees¾the best workers are hired first.
e. economies of scale.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   Costs              KEY:  BLOOM’S: Comprehension

 

  1. Which of the following does not refer to diminishing marginal returns?
a. The application of increasing amounts of fertilizer to a field of corn
b. Increasing numbers of seat belts in an automobile
c. Closing part of a restaurant because of a lack of servers
d. Increasing the number of assistant vice presidents as the size of the firm increases
e. Increasing the number of students in one classroom

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Application

 

  1. The law stating that added quantities of a variable resource will eventually result in less additional output is called the
a. law of consumer sovereignty.
b. profit maximization rule.
c. law of diminishing marginal returns.
d. law of unintended consequences.
e. antivariable output law.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Knowledge

 

  1. If the total cost of producing 6 units is $228 and the total cost of producing 7 units is $245, what is the marginal cost of producing the seventh unit?
a. $35
b. $245
c. $3
d. $38
e. $17

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   Costs              KEY:  BLOOM’S: Application

 

  1. Total cost is the cost of
a. land and labor.
b. labor and capital.
c. just land.
d. all resources except physical capital.
e. land, labor, and capital.

 

 

ANS:  E                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Application

 

  1. Average total cost is the
a. cost of all resources divided by the quantity of resources.
b. cost of all resources divided by the quantity of output.
c. quantity of output divided by the cost of all resources.
d. change in the cost of all resources divided by the change in the quantity of resources.
e. change in the cost of all resources divided by the change in the quantity of output.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Application

 

  1. Marginal total cost is the
a. cost of all resources divided by the quantity of resources.
b. cost of all resources divided by the quantity of output.
c. change in the cost of all resources divided by the quantity of resources.
d. change in the cost of all resources divided by the change in the quantity of resources.
e. change in the cost of all resources divided by the change in the quantity of output.

 

 

ANS:  E                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Application

 

  1. The short run is a
a. 5K run.
b. period of time when plant size cannot be changed.
c. period of time when all resources are variable.
d. period of time when average total costs decline.
e. maximum of 90 days.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Knowledge

 

Table 5.1

 

Table 5.1
Total Output Total Cost
0

1

2

3

4

5

6

7

8

1,000

2,000

2,800

3,500

4,000

4,500

5,200

6,000

7,000

 

 

  1. Refer to Table 5.1. Average total cost (ATC) at 3 units of output is
a. 3,500.
b. 1,400.
c. 1,167.
d. 700.
e. 500.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   Costs              KEY:  BLOOM’S: Application

 

  1. Refer to Table 5.1. Marginal cost (MC) of the third unit of output is
a. 3,500.
b. 1,400.
c. 1,167.
d. 700.
e. 500.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   Costs              KEY:  BLOOM’S: Application

 

  1. Refer to Table 5.1. Marginal cost (MC) is equal to average total cost (ATC)
a. between 1 and 2 units of output.
b. between 6 and 7 units of output.
c. between 7 and 8 units of output.
d. between 9 and 10 units of output.
e. at 3 units of output.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   Costs              KEY:  BLOOM’S: Application

 

  1. Marginal cost (MC) is equal to average total cost (ATC) at
a. the maximum point of the ATC.
b. the minimum point of the ATC.
c. no point.
d. the minimum point of the MC.
e. the maximum point of the MC.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Application

 

  1. Which of the following sayings illustrates diminishing returns in the short run?
a. Too many cooks spoil the broth.
b. Jack be nimble, Jack be quick.
c. When the cat is away, the mouse will play.
d. A rolling stone gathers no moss.
e. The grass is always greener on the other side of the fence.

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Comprehension

 

  1. The law of diminishing returns causes the shape of the average-total-cost curve to be
a. hump-shaped.
b. U-shaped.
c. bell-shaped.
d. a circle.
e. a straight line.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Comprehension

 

  1. When diminishing marginal returns occurs, the
a. total variable cost starts to rise.
b. total cost starts to rise.
c. average total cost starts to rise.
d. average variable cost starts to rise.
e. marginal cost starts to rise.

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Knowledge

 

  1. Which of the following does not change with the level of output?
a. Total cost
b. Total variable cost
c. Marginal cost
d. Total fixed cost
e. Average cost

 

 

ANS:  D                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Knowledge

 

Table 5.2

 

Table 5.2
Quantity of Output Total Fixed Cost Total Variable Cost
1

2

3

4

5

6

7

8

$40

$40

$40

$40

$40

$40

$40

$40

$  30

$  44

$  60

$  80

$110

$150

$200

$280

 

 

  1. Refer to Table 5.2. We can conclude that the marginal-cost curve intersects the average-variable-cost curve at ____ units of output and the average-total-cost curve at ____ units of output.
a. 1; 1
b. 2; 3
c. 4; 4
d. 4; 5
e. 6; 7

 

 

ANS:  D                    PTS:   1                    DIF:    Challenging    NAT:  BPROG: Analytic

TOP:   Costs              KEY:  BLOOM’S: Application

 

  1. In Table 5.2, the average fixed cost of the first unit of output is ____, while the average fixed cost of producing 8 units of output is ____.
a. $30; $40
b. $40; $5
c. $40; $40
d. $40; $280
e. $40; $320

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   Costs              KEY:  BLOOM’S: Application

 

  1. In Table 5.2, marginal cost is largest for the
a. first unit produced.
b. fourth unit produced.
c. fifth unit produced.
d. sixth unit produced.
e. eighth unit produced.

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   Costs              KEY:  BLOOM’S: Application

 

  1. Refer to Table 5.2. For what unit of output is the marginal cost double the total fixed cost?
a. 1
b. 4
c. 5
d. 6
e. 8

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   Costs              KEY:  BLOOM’S: Application

 

  1. If the firm described in Table 5.2 decided to produce nothing, which of the following would be true?
a. Total cost would be zero.
b. Total variable cost would be $30.
c. Total fixed cost would be $40.
d. Average total cost would be zero.
e. Marginal cost would be $10.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   Costs              KEY:  BLOOM’S: Application

 

  1. Refer to Table 5.2. Following which unit of output does the law of diminishing marginal returns cause per-unit costs to increase?
a. 1
b. 4
c. 6
d. 7
e. None; the law of diminishing marginal returns does not apply.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   Costs              KEY:  BLOOM’S: Application

 

  1. In Table 5.2, marginal cost is equal to average total cost at a quantity of
a. 1.
b. 3.
c. 4.
d. 5.
e. 8.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   Costs              KEY:  BLOOM’S: Application

 

Table 5.3

 

Table 5.3
Total Output Total Cost
  0

2

4

6

8

10

$100

$196

$212

$310

$430

$570

 

 

  1. Refer to Table 5.3. Assuming that costs are equally distributed for the odd output integers, the marginal cost of the sixth unit is
a. $49.
b. $98.
c. $310.
d. $80.
e. $261.

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   Costs              KEY:  BLOOM’S: Application

 

  1. In Table 5.3, when total output is 8 units, the average variable cost is
a. $53.75.
b. $41.25.
c. $15.
d. $3,440.
e. impossible to determine from the information given.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   Costs              KEY:  BLOOM’S: Application

 

  1. Refer to Table 5.3. If the average variable cost is $52 for an output of 11 units, the
a. total cost of 11 units of output will be $622.
b. total variable cost is $622.
c. marginal cost of the eleventh unit is $52.
d. marginal cost of the eleventh unit is $102.
e. total variable cost is $576.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   Costs              KEY:  BLOOM’S: Application

 

  1. Refer to Table 5.3. If the production of 2 extra units (units 11 and 12) increases total cost by $162, then the
a. marginal cost of the twelfth unit will be $162.
b. total cost of producing 12 units will be $894.
c. average variable cost of producing 11 units is $732.
d. average total cost of producing 12 units is $61.
e. thirteenth unit will have to go up in price.

 

 

ANS:  D                    PTS:   1                    DIF:    Challenging    NAT:  BPROG: Analytic

TOP:   Costs              KEY:  BLOOM’S: Application

 

  1. In Table 5.3, the average fixed cost of the first unit of output is
a. $48.
b. $96.
c. $98.
d. $100.
e. impossible to determine from the information given.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   Costs              KEY:  BLOOM’S: Application

 

  1. Diminishing marginal returns occur because
a. average and marginal relationships behave very differently with respect to each other.
b. the efficiency of variable resources depends on the quantity of the fixed resources.
c. producers are not careful enough in the manufacturing process.
d. workers are lazy and inefficient.
e. workers in some industries lack an adequate formal education.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Knowledge

 

  1. The law of diminishing marginal returns states that, when successive equal amounts of a variable resource are combined with a fixed amount of another resource,
a. marginal increases in output that can be attributed to each additional unit of the variable resource will eventually increase.
b. total output always increases.
c. marginal increases in output that can be attributed to each additional unit of the variable resource will eventually decline.
d. total output can never increase.
e. total output can become negative.

 

 

ANS:  C                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Knowledge

 

  1. Suppose a mechanic uses $150,000 of his own money to start a business. The rate of interest he could earn in a savings account is 1 percent, and the rate of interest he could earn by investing in bonds is 3 percent. What is the opportunity cost of capital when the mechanic uses his money to start his own business?
a. $1,500 per year
b. $3,000 per year
c. $4,500 per year
d. $6,000 per year
e. $150,000

 

 

ANS:  C                    PTS:   1                    DIF:    Challenging    NAT:  BPROG: Analytic

TOP:   Maximizing Profit                           KEY:  BLOOM’S: Application

 

  1. An example of an opportunity cost not measured in the accounting costs of a business firm is
a. payment for the cost of raw materials.
b. wages paid to labor.
c. labor services provided by the firm’s owner without reimbursement.
d. electric utility expense.
e. marketing costs that had little payoff.

 

 

ANS:  C                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Maximizing Profit

KEY:  BLOOM’S: Application

 

  1. Accountants refer to zero economic profit as
a. negative actuarial profit.
b. equity income.
c. total profit.
d. normal profit.
e. regular profit.

 

 

ANS:  D                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Maximizing Profit

KEY:  BLOOM’S: Knowledge

 

Scenario 5.1

 

A dentist’s practice is organized as a sole proprietorship. Last year the dentist’s total revenue was $320,000 and total costs were $250,000. The dentist left a job paying $112,000 a year to start the sole proprietorship.

 

  1. According to the information in Scenario 5.1, how much accounting profit did the dentist make last year?
a. $320,000
b. $208,000
c. $112,000
d. $70,000
e. -$42,000

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   Maximizing Profit                           KEY:  BLOOM’S: Application

 

  1. According to the information in Scenario 5.1, how much economic profit did the dentist make last year?
a. $320,000
b. $208,000
c. $112,000
d. $70,000
e. -$42,000

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   Maximizing Profit                           KEY:  BLOOM’S: Application

 

  1. Economic profit is the difference between a firm’s total revenue and its
a. average costs.
b. mandatory costs.
c. opportunity costs not measured in explicit costs.
d. accounting costs.
e. opportunity costs.

 

 

ANS:  E                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Maximizing Profit

KEY:  BLOOM’S: Knowledge

 

  1. A firm earns a positive economic profit when total revenue exceeds
a. all costs, including opportunity costs.
b. variable costs.
c. fixed costs.
d. per-unit costs.
e. accounting costs.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Maximizing Profit

KEY:  BLOOM’S: Knowledge

 

  1. The existence of economic profits in a competitive market
a. will attract competitors.
b. is usually against the law.
c. allows firms to create monopolies.
d. results in normality.
e. increases negative economic net worth.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Maximizing Profit

KEY:  BLOOM’S: Comprehension

 

  1. If a firm has total revenue of $100,000, the owner’s labor in the firm is valued at $20,000, and the firm has explicit costs of $90,000, then the firm has earned a(n)
a. economic profit of $10,000.
b. accounting profit of $20,000.
c. negative economic profit of $10,000.
d. accounting loss of $10,000.
e. accounting costs of $110,000.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   Maximizing Profit                           KEY:  BLOOM’S: Application

 

  1. If a firm’s total cost, including opportunity costs, equals total revenue, then economic profit
a. exceeds normal profit.
b. is zero.
c. equals fixed costs.
d. equals variable costs.
e. equals accounting costs.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Maximizing Profit

KEY:  BLOOM’S: Knowledge

 

  1. A firm earns an economic profit when total profit exceeds
a. economic costs.
b. accounting costs.
c. normal accounting profit.
d. normal accounting costs.
e. normal accounting costs less economic costs.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Maximizing Profit

KEY:  BLOOM’S: Knowledge

 

  1. When Ford Motor Company reports that it earned a loss of $100 million for the fourth quarter of 2007, the firm is
a. reporting economic profit.
b. reporting normal profit.
c. earning a negative economic profit of more than $100 million.
d. earning positive economic profit.
e. earning normal accounting profit.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   Maximizing Profit

KEY:  BLOOM’S: Comprehension

 

  1. When a firm makes ____ profit, this sends a signal to others. More competitors would enter the business, increasing supply and driving prices ____.
a. zero economic profit; up
b. normal profit; down
c. positive accounting profit; down
d. positive economic profit; up
e. positive economic profit; down

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   Maximizing Profit

KEY:  BLOOM’S: Comprehension

 

  1. Which of the following is not a variable cost at the sandwich shop?
a. Cost of tomatoes
b. Cost of labor
c. Cost of rent
d. Cost of electricity
e. Cost of bread

 

 

ANS:  C                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Application

 

  1. Costs which do not change as output changes are called
a. marginal costs
b. variable costs
c. fixed costs
d. accounting costs
e. short run costs

 

 

ANS:  C                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Knowledge

 

  1. Normal profits refer to
a. fixed costs.
b. variable costs.
c. the accounting profit that would correspond to zero economic profit.
d. positive economic profits.
e. zero accounting profits.

 

 

ANS:  C                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Maximizing Profit

KEY:  BLOOM’S: Knowledge

 

  1. The addition to a business firm’s total receipts (revenue) that comes from selling one more unit of output is called
a. total costs.
b. normal profit.
c. marginal costs.
d. marginal revenue.
e. total revenue.

 

 

ANS:  D                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Knowledge

 

  1. If the marginal costs exceed marginal revenue, the firm
a. is maximizing profit.
b. should reduce its level of output to increase profit.
c. would increase profits by increasing production.
d. should shut down.
e. is minimizing its loss.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Application

 

  1. A firm maximizes profit when
a. total revenue equals total cost.
b. marginal revenue equals marginal cost.
c. total revenue is maximized.
d. it produces its output at the lowest cost per unit.
e. it produces the quantity that consumers desire.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Application

 

Figure 5.1

 

 

  1. In Figure 5.1 the firm is maximizing profit at a quantity of
a. 10.
b. 35.
c. 50.
d. 75.
e. 90.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   The Profit Maximizing Rule: MR = MC                            KEY:  BLOOM’S: Application

 

  1. Refer to Figure 5.1. If the current production level is 90 and the firm wishes to maximize profit, it should
a. leave the current production level unchanged.
b. decrease the quantity produced to 75.
c. decrease the quantity produced to 50.
d. decrease the quantity produced to 35.
e. increase production until MR = MC.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   The Profit Maximizing Rule: MR = MC                            KEY:  BLOOM’S: Application

 

  1. In Figure 5.1, what profit does the firm make on the thirty-fifth good produced and sold?
a. $0
b. $50
c. $70
d. $120
e. $1,750

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   The Profit Maximizing Rule: MR = MC                            KEY:  BLOOM’S: Application

 

  1. Refer to Figure 5.1. At a quantity of 10, the firm should ____, but at a quantity of 75, the firm should ____.
a. leave production unchanged; also leave production unchanged
b. leave production unchanged; decrease production
c. increase production; decrease production
d. increase production; leave production unchanged
e. decrease production; increase production

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   The Profit Maximizing Rule: MR = MC                            KEY:  BLOOM’S: Application

 

Figure 5.2

 

 

  1. Refer to Figure 5.2. If the firm is incurring losses, we can say with certainty that
a. the firm is producing and selling below quantity Q1.
b. the firm is producing and selling above quantity Q3.
c. the firm should increase production.
d. the firm should shut down.
e. no decision should be made about increasing or decreasing the firm’s production level unless more information is provided.

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   The Profit Maximizing Rule: MR = MC                            KEY:  BLOOM’S: Application

 

  1. Refer to Figure 5.2. If the firm is producing Q3 units of output, we know that the firm
a. could increase profit by producing and selling less.
b. could increase profit by producing and selling more.
c. is maximizing profit or minimizing losses.
d. is earning a normal profit.
e. has made a loss on each unit produced before Q3.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   The Profit Maximizing Rule: MR = MC                            KEY:  BLOOM’S: Application

 

  1. Assume that marginal revenue equals rising marginal cost at 100 units of output. At this output level, a profit-maximizing firm’s total fixed cost is $600 and its total variable cost is $400. If the price of the product is $10 per unit and the firm produces 100 units, the firm will earn an economic profit of
a. zero.
b. $400.
c. more than zero but less than $100.
d. $100.
e. more than $100.

 

 

ANS:  A                    PTS:   1                    DIF:    Challenging    NAT:  BPROG: Analytic

TOP:   The Profit Maximizing Rule: MR = MC                            KEY:  BLOOM’S: Application

 

  1. Assume that marginal revenue equals rising marginal cost at 100 units of output. At this output level, a profit-maximizing firm’s total fixed cost is $600 and its total variable cost is $400. If the price of the product is $8 per unit, the firm should produce
a. zero units of output.
b. less than 100 units of output.
c. 100 units of output.
d. more than 100 units of output.
e. The amount is impossible to determine from the information given.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   The Profit Maximizing Rule: MR = MC                            KEY:  BLOOM’S: Application

 

  1. Assume that marginal revenue equals rising marginal cost at 100 units of output. At this output level, a profit-maximizing firm’s total fixed cost is $600 and its total variable cost is $400. If the price of the product is $8 per unit and the firm produces the profit-maximizing level of output, the firm will earn an economic profit of
a. -$200.
b. zero.
c. $100.
d. $200.
e. $800.

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   The Profit Maximizing Rule: MR = MC                            KEY:  BLOOM’S: Application

 

  1. Assume that marginal revenue equals rising marginal cost at 100 units of output. At this output level, a profit-maximizing firm’s total fixed cost is $600 and its total variable cost is $400. If the price of the product is $5 per unit, the firm should produce
a. zero units of output.
b. less than 100 units of output.
c. 100 units of output.
d. more than 100 units of output.
e. The amount is impossible to determine from the information given.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   The Profit Maximizing Rule: MR = MC                            KEY:  BLOOM’S: Application

 

  1. A profit-maximizing firm will produce the level of output such that
a. average revenue equals average cost.
b. average revenue equals variable cost.
c. marginal revenue equals rising marginal cost.
d. marginal cost equals rising marginal revenue.
e. marginal revenue exceeds marginal cost by the maximum amount.

 

 

ANS:  C                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Knowledge

 

  1. Assume that a firm is producing an output level such that marginal revenue equals marginal cost. One can correctly conclude that
a. the firm is earning positive economic profit.
b. the firm is earning normal profit.
c. the firm is breaking even.
d. total cost exceeds total revenue by the maximum amount.
e. as long as the firm is covering all of its variable costs, it is producing at the optimal level of output.

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Knowledge

 

  1. Assume that marginal revenue equals rising marginal cost at 100 units of output. At this output level, a profit-maximizing firm’s total fixed cost is $600 and its total variable cost is $400. If the price of the product is $15 per unit, the firm should produce
a. zero units of output.
b. less than 100 units of output.
c. 100 units of output.
d. more than 100 units of output.
e. The amount is impossible to determine from the information given.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   The Profit Maximizing Rule: MR = MC                            KEY:  BLOOM’S: Application

 

  1. Assume that marginal revenue equals rising marginal cost at 100 units of output. At this output level, a profit-maximizing firm’s total fixed cost is $600 and its total variable cost is $400. If the price of the product is $15 per unit and the firm produces at the profit-maximizing level, the firm will earn an economic profit equal to
a. zero.
b. its normal profit.
c. more than zero but less than $500.
d. $500.
e. more than $500.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   The Profit Maximizing Rule: MR = MC                            KEY:  BLOOM’S: Application

 

  1. A firm wishing to maximize profits will produce at the level of output where
a. economic profit is zero.
b. its total cost curve intersects its total revenue curve.
c. costs are at a minimum.
d. total revenue exceeds total cost by the largest amount.
e. marginal revenue exceeds marginal cost by the greatest amount.

 

 

ANS:  D                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Knowledge

 

  1. At a firm’s profit-maximizing level of output,
a. marginal revenue exceeds marginal cost.
b. marginal revenue is less than marginal cost.
c. total revenue equals total cost.
d. marginal revenue equals marginal cost.
e. normal profit is zero.

 

 

ANS:  D                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Knowledge

 

  1. When a firm’s marginal revenue exceeds its marginal cost, it is producing
a. too much, and should cut back on production to maximize profit/minimize losses.
b. too little, and should increase production to maximize profit/minimize losses.
c. the right amount, as revenue exceeds cost.
d. too much and its machines and employees are overworked.
e. Not enough information is provided to determine what the firm should do.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Comprehension

 

  1. You have rented an apartment for $1,000 per month, on a 12-month lease, and have just been offered a summer internship in Washington, D.C. with the President’s Council of Economic Advisors (congratulations!). Your rent is $1,000 per month. You want to sublet your apartment and put an ad on Craigslist. Only one response is received; someone attending summer school at your university offers you $500 per month. Using marginal analysis, you will
a. wait to get $1,000 per month, because you don’t want to lose any money.
b. take $500 because it’s better than nothing.
c. wait to get $1,200 per month, because people always pay more at the last minute.
d. decide not to sublet the apartment because it’s not allowed in your lease.
e. Consult your economic advisor.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   The Profit Maximizing Rule: MR = MC                            KEY:  BLOOM’S: Comprehension

 

  1. The additional cost a firm incurs from selling an extra unit of output is
a. total cost.
b. marginal cost.
c. average cost.
d. fixed cost.
e. variable cost.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Knowledge

 

  1. When marginal cost is rising and exceeds marginal revenue, the profit-maximizing firm will
a. produce more.
b. produce less.
c. continue producing the same level of output in the short run.
d. shut down in the long run.
e. exit in the long run.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Application

 

  1. Assume that marginal revenue equals rising marginal cost at 100 units of output. At this output level, a profit-maximizing firm’s total fixed cost is $600 and its total variable cost is $400. If the price of the product is $3 per unit and the firm produces at the profit-maximizing level, the firm will earn an economic profit equal to
a. $1,000.
b. $700.
c. $400.
d. $600.
e. -$700.

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   The Profit Maximizing Rule: MR = MC                            KEY:  BLOOM’S: Application

 

  1. Economic profit is
a. part of total cost.
b. total revenue minus all opportunity costs.
c. total revenue minus accounting costs.
d. the opportunity cost of doing business.
e. total variable cost minus total fixed cost.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Knowledge

 

Figure 5.3

 

 

  1. In Figure 5.3, what is the curve marked I?
a. Demand
b. Marginal revenue
c. Average revenue
d. Marginal cost
e. Average total cost

 

 

ANS:  D                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Application

 

  1. In Figure 5.3, what is the curve marked III?
a. Demand
b. Marginal revenue
c. Average revenue
d. Marginal cost
e. Average total cost

 

 

ANS:  B                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Application

 

  1. In the long run,
a. all of a firm’s resources are variable.
b. new technology cannot be introduced.
c. at least one of the firm’s resources is fixed.
d. most of the firm’s resources cannot be varied.
e. none of the firm’s resources is variable.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Creating Barriers to Entry

KEY:  BLOOM’S: Knowledge

 

  1. In the short run,
a. all the firm’s resources are variable.
b. none of the firm’s resources is variable.
c. the time period always covers one year.
d. technically efficient production is not possible.
e. at least one of the firm’s resources cannot be varied.

 

 

ANS:  E                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Creating Barriers to Entry

KEY:  BLOOM’S: Knowledge

 

  1. The long run is a
a. period of three years or longer.
b. period long enough to allow firms to change plant size and capacity.
c. period long enough to allow firms to make economic decisions.
d. period that affects larger rather than smaller firms.
e. race of 10 kilometers or more.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Creating Barriers to Entry

KEY:  BLOOM’S: Knowledge

 

  1. When a firm is making decisions about the use of fixed and variable resources, it is
a. focusing on the short run.
b. focusing on the long run.
c. focusing on the very long run.
d. focusing on the period in which no changes can be made.
e. most likely contemplating a change in its size.

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   Creating Barriers to Entry

KEY:  BLOOM’S: Comprehension

 

  1. The short run
a. is less than one year.
b. requires that at least one resource be fixed.
c. requires that all resources be fixed.
d. is just long enough to permit entry and exit.
e. requires that all resources be variable.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Creating Barriers to Entry

KEY:  BLOOM’S: Knowledge

 

  1. In the long run,
a. some resources are variable and some resources are fixed.
b. firms can enter or exit the industry.
c. all resources are fixed.
d. at least one resource is fixed.
e. all costs are considered by the accountant.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Creating Barriers to Entry

KEY:  BLOOM’S: Knowledge

 

  1. In the short run,
a. all production costs must be fixed.
b. all production resources can be varied in quantity.
c. only variable costs determine how much to produce.
d. there are both variable and fixed costs of production.
e. a firm cannot experience diminishing returns.

 

 

ANS:  D                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Creating Barriers to Entry

KEY:  BLOOM’S: Knowledge

 

  1. Which of the following may be fixed in the short run?
a. Plant capacity
b. Machinery
c. The number of firms in an industry
d. Essential raw materials
e. Any one or more of the resources may be fixed in the short run.

 

 

ANS:  E                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   Creating Barriers to Entry

KEY:  BLOOM’S: Knowledge

 

TRUE/FALSE

 

  1. The additional cost a firm incurs from selling an extra unit of output is average cost.

 

ANS:  F                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Knowledge

 

  1. Each unit increase in output increases cost by the same amount as resource prices are determined elsewhere.

 

ANS:  F                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Comprehension

 

  1. Marginal cost and average total cost curves in the short run are similar in that they are U-shaped.

 

ANS:  T                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Knowledge

 

  1. The long run is a period of time just long enough so that at least one of the resources cannot be changed.

 

ANS:  F                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Knowledge

 

  1. In the short run, all resources are fixed.

 

ANS:  F                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Comprehension

 

  1. If adding a seventh worker to the crew in a fast-food restaurant results in fewer additional meals being prepared than when the sixth worker was added, the law of diminishing marginal returns has set in.

 

ANS:  T                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Comprehension

 

  1. When economic profit is zero, the firm’s total revenue equals total costs, including opportunity costs.

 

ANS:  T                    PTS:   1                    DIF:    Challenging

NAT:  BPROG: Reflective Thinking           TOP:   Maximizing Profit

KEY:  BLOOM’S: Knowledge

 

  1. Opportunity cost is the full value of the next best alternative.

 

ANS:  T                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   Maximizing Profit

KEY:  BLOOM’S: Knowledge

 

  1. The opportunity cost of going to the movies is the price of entry into the movies.

 

ANS:  F                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Maximizing Profit

KEY:  BLOOM’S: Application

 

  1. Economic profit is the difference between a firm’s total revenue and its accounting costs.

 

ANS:  F                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Maximizing Profit

KEY:  BLOOM’S: Knowledge

 

  1. To an economist, total cost is total accounting cost plus opportunity costs not measured in accounting costs.

 

ANS:  T                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Maximizing Profit

KEY:  BLOOM’S: Knowledge

 

  1. Total revenue less accounting costs, less the opportunity costs of the resources used in the business but not measured in accounting costs is called “economic profit”.

 

ANS:  T                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Maximizing Profit

KEY:  BLOOM’S: Knowledge

 

  1. Profit maximization always implies that total revenue must exceed total costs.

 

ANS:  F                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Maximizing Profit

KEY:  BLOOM’S: Comprehension

 

  1. When economic profit is zero, only normal profit is earned.

 

ANS:  T                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Maximizing Profit

KEY:  BLOOM’S: Knowledge

 

  1. Normal profit is also called positive economic profit.

 

ANS:  F                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   Maximizing Profit

KEY:  BLOOM’S: Knowledge

 

  1. David found that keeping his restaurant open additional hours Friday and Saturday night generated less extra revenue than the extra cost. To maximize profit, David should keep the restaurant open those additional hours.

 

ANS:  F                    PTS:   1                    DIF:    Easy               NAT:  BPROG: Analytic

TOP:   Maximizing Profit                           KEY:  BLOOM’S: Knowledge

 

  1. The objective for a firm is to maximize total revenue.

 

ANS:  F                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Knowledge

 

  1. Assume that a firm is producing an output level such that marginal revenue equals marginal cost. One can correctly conclude that the firm is earning a normal profit.

 

ANS:  F                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Knowledge

 

  1. To maximize profits, a firm should produce the output level where total revenue equals total cost.

 

ANS:  F                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Knowledge

 

  1. If a firm is producing where marginal revenue is less than marginal cost, the firm should increase its level of output to increase profits.

 

ANS:  F                    PTS:   1                    DIF:    Challenging

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Application

 

  1. Assume that marginal revenue equals rising marginal cost at 100 units of output. At this output level, a profit-maximizing firm’s total fixed cost is $600 and its total variable cost is $400. If the price of the product is $8 per unit, then the firm should produce less than 100 units of output.

 

ANS:  F                    PTS:   1                    DIF:    Moderate        NAT:  BPROG: Analytic

TOP:   The Profit Maximizing Rule: MR = MC                            KEY:  BLOOM’S: Application

 

  1. A profit-maximizing firm will produce the level of output such that marginal cost is less than rising marginal revenue.

 

ANS:  F                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Knowledge

 

  1. The demand curve is also the average-revenue curve.

 

ANS:  T                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Knowledge

 

  1. When the marginal-revenue curve is falling, the average-revenue curve is also falling.

 

ANS:  T                    PTS:   1                    DIF:    Challenging

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Knowledge

 

  1. If the marginal cost exceeds the average cost, the average cost is rising.

 

ANS:  T                    PTS:   1                    DIF:    Challenging

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Knowledge

 

  1. If the marginal cost is lower than the average cost, the average cost is falling.

 

ANS:  T                    PTS:   1                    DIF:    Challenging

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Knowledge

 

  1. The marginal cost and average cost curves always intersect at the minimum average cost.

 

ANS:  T                    PTS:   1                    DIF:    Challenging

NAT:  BPROG: Reflective Thinking           TOP:   Costs              KEY:  BLOOM’S: Knowledge

 

  1. The MC = MR rule is widely known in the company’s management, and written in the operations manuals.

 

ANS:  F                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Comprehension

 

  1. Oftentimes last minute deals can be found because firms follow the MC = MR Rule.

 

ANS:  T                    PTS:   1                    DIF:    Easy

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Comprehension

 

  1. Marginal revenue ultimately depends on the firms as they have the ability to set the price for their products.

 

ANS:  F                    PTS:   1                    DIF:    Moderate

NAT:  BPROG: Reflective Thinking           TOP:   The Profit Maximizing Rule: MR = MC

KEY:  BLOOM’S: Knowledge

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