Full Test Bank Supply Decisions Chapter 5

Chapter 05 Test Bank KEY

1. The factors of production include

A. wages, rent, and profit.

B. profit and wages.

C. land, labor, capital, and entrepreneurship.

D. computers and machinery.

2. Flour would be considered which of the following factors of production?

A. land

B. capital

C. labor

D. entrepreneurship

3. Terry's Taco Patio uses corn tortillas, meat, a large property, and workers to make their tacos. Which of the following factors of production is not included as part of this list?

A. land

B. labor

C. capital

D. entrepreneurship

4. Land, labor, capital, and entrepreneurship are called

A. factors of production.

B. factors of demand.

C. fixed costs.

D. variable costs.

5. Which of the following are inputs to production for a typical college?

A. sporting event tickets

B. tuition

C. parking fees

D. the library

6. The maximum output that can be produced from a set of inputs is measured by

A. the production function.

B. the demand schedule.

C. fixed costs.

D. marginal costs.

7. Which of the following statements concerning the relationship between total product (TP) and marginal physical product (MPP) is not correct?

A. TP will continue to rise even though MPP is falling but greater than zero.

B. TP is increasing at an increasing rate if MPP is increasing.

C. TP will fall if MPP is negative.

D. TP will fall if MPP is falling.

8. The limits to the production of any good are reflected in the

A. law of demand.

B. capacity curve.

C. demand curve.

D. production function.

9. When a firm produces a level of output on the production function

A. marginal physical product is zero.

B. maximum efficiency is achieved.

C. opportunity cost for resources is at a maximum.

D. profits are maximized.

10. If the first, second, third, and fourth worker employed by the firm add 15, 21, 12, and 8 units of total product respectively, we can conclude that

A. the marginal product of all four workers is 14.

B. the total product of two workers is 42.

C. after the second worker marginal product declines.

D. adding a fourth worker will cause total product to decline.

11. The law of diminishing returns means that

A. total product will eventually increase at a decreasing rate as more inputs are employed.

B. the marginal product will increase at an increasing rate.

C. average total costs are rising and then falling as output is increased.

D. average fixed cost will fall as production increases.

12. The change in total output that results from one additional unit of input is the

A. marginal physical product.

B. average product of the input.

C. unit cost of the input.

D. input price.

13. Marginal physical product is

A. equal to the average output of a worker.

B. the additional utility a consumer gets from the last unit of a product.

C. the additional output from using one more unit of labor.

D. equal to the total product of labor.

14. The law of diminishing returns can explain why

A. marginal cost eventually increases in the short run as more output is produced.

B. the demand curve is typically downward-sloping.

C. the average fixed-cost curve declines as long as output increases.

D. marginal cost decreases as more output is produced.

15. Ceteris paribus, the law of diminishing returns states that beyond some point the

A. return on stocks and bonds diminish as more are purchased.

B. addition to total utility declines as more units are consumed.

C. marginal physical product of a variable input declines as more of it is used.

D. output of any good or service increases as more variable input is used.

16. If more of an input factor is used, while holding other inputs constant, a firm will eventually experience

A. diminishing returns.

B. falling marginal cost.

C. rising marginal physical product.

D. rising consumer demand.

17. As more labor is hired in the short run, diminishing returns are observed because

A. the new workers tend to be worse at their job than previously hired workers.

B. each new worker has less capital and land (fixed inputs) to use at work.

C. all the workers begin to socialize more and work less.

D. the new workers are less skilled.

18. The law of diminishing returns indicates that the marginal physical product of an input declines as more

A. output is produced with the most efficient combination of inputs.

B. of the input is used, holding output constant.

C. of the input is used, holding other inputs constant.

D. of the good is consumed.

19. Assume a toy company hires an additional worker to assemble toys, and the size of the factory and amount of equipment remain constant. As a result, the level of output increases but by a smaller amount than when the previous additional worker was hired. This is an example of

A. the law of poor planning.

B. the law of diminishing returns.

C. Say's Law.

D. the law of substitution.

20. Assume a restaurant hires an additional chef who is as qualified as the current chefs. As a result, the level of output increases but by a smaller amount than when the previous additional chef was hired. Which of the following best explains this occurrence?

A. The chefs are working with a fixed amount of space and equipment and they get in each other's way.

B. The additional wages cause profit to decrease.

C. The amount of food available for preparation is limited so output decreases.

D. The two chefs do not agree on food preparation and spend too much time arguing.

21. Which of the following is the best explanation of why the law of diminishing returns does not apply in the long run?

A. All inputs to production are variable in the long run.

B. The marginal physical product does not change in the long run.

C. In the long run, firms have enough time to find more qualified workers.

D. All inputs to production are fixed in the long run.

22. Total revenue minus total cost equals

A. profit.

B. variable costs.

C. economic costs.

D. marginal revenue.

23. Profit is the difference between

A. total cost and variable cost.

B. total revenue and total cost.

C. marginal cost and fixed cost.

D. average total cost and economic cost.

24. A firm can be identified as profitable if the

A. sum of total revenue and total costs is high.

B. difference between its total revenue and total costs is negative.

C. difference between its total revenue and total costs is positive.

D. total costs and marginal costs are low.

25. For most firms, the most desirable rate of output is the one that

A. minimizes total costs.

B. maximizes total profit.

C. minimizes marginal costs.

D. maximizes total revenue.

26. The market value of all resources used in producing a good or service is expressed by

A. implicit costs.

B. total costs.

C. fixed costs.

D. variable costs.

27. Which of the following is equivalent to total cost?

A. fixed costs plus variable costs

B. variable costs plus marginal costs

C. economic costs plus accounting costs

D. marginal costs plus implicit costs

28. The sum of fixed cost and variable cost at any rate of output is equal to

A. average total cost.

B. total profit.

C. total cost.

D. marginal cost.

29. Which of the following will always increase as output increases?

A. total cost

B. average total cost

C. marginal cost

D. fixed costs

30. Costs of production that do not change with the rate of output are

A. nonexistent.

B. variable costs.

C. fixed costs.

D. marginal costs.

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

A. raw material costs.

B. labor costs.

C. shipping costs.

D. property taxes.

32. Total cost is equal to _____ cost at an output level of zero.

A. variable

B. fixed

C. economic

D. marginal

33. It is impossible to:

A. Determine total costs in the short run.

B. Identify variable costs in the long run.

C. Identify variable costs in the short run.

D. Avoid fixed costs in the short run.

34. Costs of production that change with the rate of output are

A. sunk costs.

B. fixed costs.

C. opportunity costs.

D. variable costs.

35. When producing jeans, which of the following are not a variable cost in the short run?

A. wage payments to labor

B. zipper costs for each jean

C. rent paid for the use of a factory

D. denim material costs for each jean

36. Which of the following is most likely a variable cost in the short run?

A. labor payments

B. property taxes

C. rent payments

D. a business license fee

37. If a firm increases output, total costs will rise because of a change in

A. fixed costs.

B. absolute costs.

C. variable costs.

D. regular costs.

38. Average total cost is defined as

A. total cost divided by the quantity produced.

B. the change in total cost because of a one-unit increase in output.

C. the change in total output divided by the change in total cost.

D. total output times total cost.

39. Which of the following is equivalent to average total cost?

A. fixed cost plus variable cost

B. fixed cost and variable cost added together and then divided by output

C. the change in total cost divided by the change in output

D. marginal cost plus variable cost

40. The general shape of the average total cost curve is

A. upward-sloping.

B. u-shaped.

C. flat.

D. downward-sloping.

41. The reason the average total cost curve declines initially is because of

A. falling average fixed costs.

B. falling average variable costs.

C. falling marginal costs.

D. both falling average fixed costs and falling average variable costs.

42. Marginal cost is equal to

A. total cost divided by output.

B. the change in total cost divided by the change in output.

C. the change in total cost divided by the change in price.

D. total cost divided by total revenue.

43. Marginal cost will increase with greater output if

A. marginal physical product is decreasing.

B. marginal physical product is increasing.

C. total variable cost is decreasing.

D. total fixed cost is increasing.

44. If an additional unit of labor costs $30 and has an marginal physical product of 50 units of output per worker, the marginal cost is

A. $0.60 per unit.

B. $1.66 per unit.

C. $15.00 per unit.

D. $1500.00 per unit.

45. If an additional unit of labor costs $40 and has a marginal physical product of 50 units of output, the marginal cost is

A. $2,000.00 per unit.

B. $40.00 per unit.

C. $1.25 per unit.

D. $0.80 per unit.

46. If an additional unit of labor costs $25 and has a marginal physical product of 40 units of output, the marginal cost is:

A. $0.63.

B. $1.60.

C. $25.00.

D. $1,000.00.

47. Marginal cost

A. is the change in fixed cost divided by the change in quantity.

B. may initially decline and then increase as more output is produced.

C. may initially increase and then fall as more output is produced.

D. is fixed cost and variable cost added together and then divided by quantity.

48. Rising marginal costs result from

A. rising marginal physical product.

B. falling prices of variable inputs.

C. falling marginal physical product.

D. rising prices of fixed inputs.

49. Rising marginal costs are the result of

A. increasing returns to scale.

B. rising marginal physical product.

C. the law of variable returns.

D. the law of diminishing returns.

50. The selection of the short-run rate of output is the

A. production decision.

B. investment decision.

C. marginal decision.

D. industrial decision.

51. The short-run supply decision focuses on

A. marginal output versus price.

B. marginal cost versus price.

C. average total cost versus marginal revenue.

D. variable costs versus fixed costs.

52. In the short run, a manufacturer should produce the next unit of output as long as

A. marginal cost is greater than price.

B. price is greater than total cost.

C. price is greater or equal than marginal cost.

D. price equals total cost.

53. If price is greater than marginal cost for the last unit produced

A. profit is increasing as output rises.

B. profit is decreasing as output rises.

C. only economic costs are being covered.

D. average total cost is covered.

54. If price is greater than marginal cost but not average total cost, then

A. total revenues are greater than total costs.

B. the firm is earning a profit.

C. eventually the firm will go out of business.

D. the firm is experiencing diminishing marginal utility.

55. In the long run, a company will stay in business as long as price is

A. greater than or equal to marginal costs.

B. equal to variable costs.

C. equal to marginal physical product.

D. greater than or equal to average total costs.

56. When a firm makes an investment decision, it views all inputs as

A. variable over the long run.

B. variable over the short run.

C. fixed over the long run.

D. fixed over the short run.

57. The decision to build, buy, or lease a plant is known as the

A. output decision.

B. profit-maximizing decision.

C. production decision.

D. investment decision.

58. Which of the following must be considered in long-run planning?

A. production choices

B. fixed costs

C. investment choices

D. declining marginal physical product

59. Which of the following is NOT a long-run investment decision?

A. Whether to buy or lease equipment.

B. The size of the factory.

C. Whether or not to enter into the industry.

D. How intensively to use the existing plant.

60. The main difference to an economist between "short run" and "long run" is that

A. variable costs are short-run investment decisions whereas fixed costs are long-run production decisions.

B. in the short run, all resources are fixed whereas in the long run all resources are variable.

C. in the long run, all resources are variable whereas in the short run at least one resource is fixed.

D. fixed costs are more important than variable costs in the short run.

61. The planning period over which at least one resource input is fixed in quantity is the

A. long run.

B. production run.

C. short run.

D. investment decision.

62. Which of the following is most about the short run?

A. Some inputs are fixed.

B. It is less than one year.

C. It is one to two years.

D. All inputs are variable.

63. During the short run

A. all inputs can be changed.

B. some inputs are fixed.

C. factory size can be changed.

D. the number of workers cannot be changed.

64. The long run refers to

A. a time period longer than one year.

B. a time period less than one year.

C. a period of time long enough for all inputs to be varied.

D. the time period required for a firm to cycle its inventory.

65. During the long run

A. output is limited by the law of diminishing returns.

B. the firm can build or lease any size factory.

C. some inputs are fixed and some are variable.

D. there are no economic costs.

66. Explicit costs

A. include only payments to labor.

B. are the sum of actual monetary payments made for resources used to produce a good.

C. include the market value of all resources used to produce a good.

D. are the total value of resources used to produce a good but for which no monetary payment is actually made.

67. Economic cost is

A. equal to explicit costs minus implicit costs.

B. the same as dollar costs.

C. equal to the accounting cost minus implicit costs.

D. the value of all resources, both explicit and implicit, used to produce a good or service.

68. In defining costs, economists recognize

A. explicit and implicit costs, while accountants recognize only implicit costs.

B. explicit and implicit costs, while accountants recognize only explicit costs.

C. only explicit costs, while accountants recognize only implicit costs.

D. only explicit costs, while accountants recognize explicit and implicit costs.

69. Economic and accounting costs will differ

A. whenever there is more than one factor of production.

B. whenever the firm fails to maximize its profits.

C. whenever any factor of production is not paid an explicit factor payment equal to its market value.

D. in every case.

70. Economic costs are greater than accounting costs

A. only if implicit costs are greater than zero.

B. only if explicit costs are greater than implicit costs.

C. only in the long run.

D. in the short run but not the long run.

71. The best measure of the economic cost of doing your homework is

A. the tuition you pay for the class.

B. the amount you would have to pay to get someone else to do it.

C. your instructor's salary.

D. the best opportunity you give up when you do your homework.

72. Which of the following definitions is correct?

A. Economic Costs + Accounting Costs = Profit

B. Economic Profit = Accounting Profit – Implicit Costs.

C. Economic Profit ­– Implicit Costs = Accounting Profits.

D. Economic Costs + Explicit Costs = Implicit Costs.

73. Economic profit is equal to total revenue minus

A. explicit costs.

B. implicit costs.

C. both implicit costs and explicit costs.

D. marginal costs.

74. Suppose a firm incurred explicit costs of $900 and implicit costs of $200 during a day. If that day the firm sold 8 units at $300 per unit its accounting profits are

A. $1,500 and its economic profits are $1,700.

B. $1,500 and its economic profits are $1,300.

C. $1,300 and its economic profits are $1,700.

D. $1,300 and its economic profits are $1,300.

75. Suppose a firm has the following expenditures per day: $240 for wages, $150 for materials, and $80 for equipment rental. The owner of the firm owns the building in which it operates. If the firm were not operating in the building, he could rent the building for $70 per day. Total daily revenue is $600.What are the daily accounting costs for the firm described above?

A. $320

B. $390

C. $470

D. $540

76. Suppose a firm has the following expenditures per day: $240 for wages, $150 for materials, and $80 for equipment rental. The owner of the firm owns the building in which it operates. If the firm were not operating in the building, he could rent the building for $70 per day. Total daily revenue is $600.What are the daily explicit costs for the firm described above?

A. $320

B. $390

C. $400

D. $470

77. Suppose a firm has the following expenditures per day: $240 for wages, $150 for materials, and $80 for equipment rental. The owner of the firm owns the building in which it operates. If the firm were not operating in the building, he could rent the building for $70 per day. Total daily revenue is $600.What are the daily implicit costs for the firm described above?

A. $70

B. $80

C. $150

D. $220

78. Based on the law of diminishing returns, if the number of workers increases and capital investments do not keep pace then, ceteris paribus,

A. marginal physical product of labor will increase.

B. marginal physical product of labor will decrease.

C. the production function will definitely shift upward.

D. the average total cost curve will definitely decrease.

79. A firm's rising factor costs can be offset by

A. increases in productivity.

B. diminishing marginal product.

C. diminishing marginal utility.

D. rising marginal cost.

80. Which of the following government policies is least likely to increase productivity?

A. subsidies for schools

B. greater provision of student loans

C. tax incentives for firms that invest in capital

D. transfer payments to unemployed workers

81. If government policies to increase productivity are successful, then the

A. production function will shift upward.

B. marginal cost curve will shift upward.

C. average total cost curve will shift upward.

D. variable cost curve will shift upward.

82. Advances in managerial knowledge shift the production function

A. and the marginal cost curve upward.

B. and the average total cost curve downward.

C. upward and the average total cost curve downward.

D. downward and the marginal cost curve upward.

83. Improvements in technology shift the

A. production function downward.

B. marginal cost curve downward.

C. average total cost curve upward.

D. fixed cost curve upward.

84. Which of the following would cause a firm's production function to shift upward?

A. an increase in production by the firm

B. hiring more workers

C. increased investment in capital

D. an increase in wages

85. An investment in human and non-human capital will result in

A. an increase in the marginal physical product of labor.

B. an increase in marginal costs.

C. a decrease in the production function.

D. a decrease in production possibilities.

86. Labor and Output Data

Based on the Labor and Output Data table, what is the marginal physical product of the first unit of labor?

A. 0 output per worker

B. 14 output per worker

C. 16 output per worker

D. 30 output per worker

87. Labor and Output Data

Based on the Labor and Output Data table, what is the marginal physical product of the second unit of labor?

A. 12 output per worker

B. 14 output per worker

C. 16 output per worker

D. 30 output per worker

88. Labor and Output Data

Based on the Labor and Output Data table, what is the marginal physical product of the fourth unit of labor?

A. 51 output per worker

B. 42 output per worker

C. 12 output per worker

D. 9 output per worker

89. Labor and Output Data

Based on the Labor and Output Data table, where is there evidence of diminishing returns to labor?

A. first worker

B. second worker

C. third worker

D. fourth worker

90. Jeans Production

What is the marginal cost of the 15th pair of jeans?

A. $8.17 per unit

B. $20.00 per unit

C. $1.33 per unit

D. $4.00 per unit

91. Jeans Production

Based on the information in the table, what is the marginal cost of the 30th pair of jeans?

A. $4.50 per unit

B. $45.00 per unit

C. $6.00 per unit

D. $1.50 per unit

92. Jeans Production

Based on the information in the table, what is the marginal cost of the 40th pair of jeans?

A. $7.25 per unit

B. $11.00 per unit

C. $110.00 per unit

D. $2.75 per unit

93. Jeans Production

Based on the information in the table, if the firm receives $7.00 for each pair of jeans, in the short run it should

A. produce 30 pairs of jeans

B. produce 40 pairs of jeans.

C. produce 20 pairs of jeans.

D. only produce jeans if the price is greater than average total cost.

94. Jeans Production

Based on the information in the table, if the firm can sell jeans for $7.00 per pair, the total profit from producing 30 pairs is

A. $13.

B. $3.

C. $30.

D. $210.

95. Jeans Production

Based on the information in the table, if the firm can sell jeans for $7.00 per pair, the total profit from producing 40 pairs is

A. $−10.

B. $10.

C. $290.

D. $280.

96. Yearbook Costs

(This table shows the total cost of producing yearbooks using a school's print shop.)

According to the Yearbook Costs table, the production rate at which the lowest possible average total cost for yearbooks is achieved would be

A. 200 yearbooks per year.

B. 300 yearbooks per year.

C. 400 yearbooks per year.

D. 500 yearbooks per year.

97. Yearbook Costs

(This table shows the total cost of producing yearbooks using a school's print shop.)

According to the Yearbook Costs table, the marginal cost per yearbook between 100 and 200 yearbooks is equal to

A. $400 per yearbook.

B. $4 per yearbook.

C. $16 per yearbook.

D. $12 per yearbook.

98. Yearbook Costs

(This table shows the total cost of producing yearbooks using a school's print shop.)

According to the Yearbook Costs table, marginal cost is minimized when

A. the first 100 yearbooks are produced.

B. output increases from 300 to 400 yearbooks.

C. output increases from 100 yearbooks to 200 yearbooks.

D. output increases from 200 to 300 yearbooks.

99. Plant Costs

This table shows total costs at different output levels for a given plant.

According to the Plant Costs table, fixed costs

A. are equal to $40.

B. are equal to zero.

C. increase as output increases.

D. decrease as output increases.

100. Plant Costs

This table shows total costs at different output levels for a given plant.

According to the Plant Costs table, variable cost

A. is equal to $25 at an output of 10 units.

B. is the greatest at an output of zero units.

C. decreases as output increases.

D. is equal to $40 at every output level.

101. Plant Costs

This table shows total costs at different output levels for a given plant.

According to the Plant Costs table, marginal cost is lowest when

A. the first 10 units are produced.

B. output increases from 10 units to 20 units.

C. output increases from 20 units to 30 units.

D. output increases from 30 units to 40 units.

102. Plant Costs

This table shows total costs at different output levels for a given plant.

According to the Plant Costs table, the lowest average total cost occurs at a production rate of

A. 10 units per day.

B. 20 units per day.

C. 30 units per day.

D. 40 units per day.

103. Production Costs

According to the Production Costs table, the marginal cost of the first unit of output is

A. $19 per unit.

B. $10 per unit.

C. $9 per unit.

D. $3 per unit.

104. Production Costs

According to the Production Costs table, the total cost of 2 units is

A. $3.

B. $10.

C. $12.

D. $22.

105. Production Costs

According to the Production Costs table, the total cost of 3 units is

A. $25.

B. $15.

C. $10.

D. $3.

106. Production Costs

According to the Production Costs table, the variable cost of the first unit is

A. $9.

B. $10.

C. $19.

D. $29.

107. Production Costs 2

In the Production Costs 2 Table, fixed costs are equal to

A. $0, because the problem involves the long run.

B. $4.

C. $15.

D. $23.

108. Production Costs 2

According to the Production Costs 2 table, the marginal cost of the third unit of output is

A. $3.

B. $5.

C. $6.

D. $15.

109. Production Costs 2

According to the Production Costs 2 table, the total cost of 2 units of output is

A. $4.

B. $6.

C. $12.

D. $27.

110. Production Costs 2

According to the Production Costs 2 table, the total cost of 3 units of output is

A. $5.

B. $10.

C. $15.

D. $30.

111. Production Costs 2

According to the Production Costs 2 table, the variable cost of 2 units of output is

A. $8.

B. $12.

C. $15.

D. $27.

112. Production Costs 2

According to the Production Costs 2 table, the variable cost of one unit of output is

A. $8.

B. $12.

C. $15.

D. $23.

113. Production Costs 2

According to the Production Costs 2 table, the average variable cost of 3 units of output is

A. $3.

B. $5.

C. $15.

D. $30.

114.

According to the graph, the marginal physical product of the third unit of labor is

A. 8 units per worker.

B. 12 units per worker.

C. 28 units per worker.

D. 40 units per worker.

115.

According to the graph, the marginal physical product of the fourth unit of labor is

A. 6 units per worker.

B. 12 units per worker.

C. 40 units per worker.

D. 46 units per worker.

116.

According to the graph, the diminishing marginal returns first occur with the

A. second worker

B. third worker

C. fifth worker

D. sixth worker

117.

Refer to the figure. What is the marginal cost of the 12th unit of output?

A. $6.00 per unit

B. $20.00 per unit

C. $52.00 per unit

D. $72.00 per unit

118.

Refer to the figure. What is the fixed cost?

A. $20.00

B. $240.00

C. $740.00

D. $864.00

119.

Refer to the figure. What is the total cost of 10 units?

A. $240.00

B. $288.00

C. $500.00

D. $740.00

120.

Refer to the figure. What is the total variable cost when output is 10 units?

A. $500.00

B. $520.00

C. $720.00

D. $740.00

121.

Refer to the figure. What is the total variable cost when output is 12 units?

A. $500.00

B. $624.00

C. $720.00

D. $864.00

122. The production function indicates how much output producers will actually produce.

The production function indicates the potential output producers can produce. It only indicates how much a firm could produce when using inputs efficiently.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-01 Explain what the production function reveals.
Topic: Capacity Constraints: The Production Function

123. A production function shows the maximum amount of a particular good or service that can be produced with different combinations of resources.

The production function is a schedule that gives the different amounts of output that can be produced with various combinations of inputs.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-01 Explain what the production function reveals.
Topic: Capacity Constraints: The Production Function

124. Actual output will always equal the limit described by the production function.

Actual output may be less then potential output. This would happen if a firm does not use resources efficiently.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-01 Explain what the production function reveals.
Topic: Capacity Constraints: The Production Function

125. Marginal physical product is the change in total output associated with an additional unit of input.

Marginal physical product is the additional output produced when one additional unit of a resource is employed.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Explain why the law of diminishing returns applies.
Topic: Capacity Constraints: The Production Function

126. Total output may continue to rise even though marginal physical product is decreasing.

Although marginal physical product may be decreasing, it can still be adding to total physical product at a decreasing rate.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Explain why the law of diminishing returns applies.
Topic: Capacity Constraints: The Production Function

127. If the marginal physical product of an input is decreasing, output will also be decreasing.

If the marginal physical product is currently still positive but decreasing, this means it is still adding to output but at a decreasing rate.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Explain why the law of diminishing returns applies.
Topic: Capacity Constraints: The Production Function

128. According to the law of diminishing returns, the marginal physical product of a variable input declines as more of it is employed with a given quantity of other inputs.

Since all of the other factors are fixed, the variable input will yield less and less output.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Explain why the law of diminishing returns applies.
Topic: Capacity Constraints: The Production Function

129. The short run implies that all factor inputs are fixed.

The short run assumes that at least one factor is fixed while at least one other is variable. In the short run capital is usually fixed while labor is considered a variable input.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Illustrate the difference between production and investment decisions.
Topic: Capacity Constraints: The Production Function

130. In the long run, all costs are variable.

The long run implies that all factor inputs are variable.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 Illustrate the difference between production and investment decisions.
Topic: Capacity Constraints: The Production Function

131. Profit is equal to total revenue minus total cost.

The difference between total revenue and total cost is the profit.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-03 Describe the nature of fixed, variable, and marginal costs.
Topic: Costs of Production

132. Fixed costs are the same as total costs at a production rate of zero units in the short run.

In the short run, fixed costs exist and are the same at all levels of production. As a result, at zero units of output, fixed costs would equal total costs.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Describe the nature of fixed, variable, and marginal costs.
Topic: Costs of Production

133. Fixed costs can be avoided in the short run.

Fixed costs cannot be avoided because a certain amount of capital and land are necessary and will be the same at all levels of production.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Describe the nature of fixed, variable, and marginal costs.
Topic: Costs of Production

134. In the short run, when output is zero, total costs are zero.

Fixed costs exist at all levels of production and when output is zero fixed cost equal total costs.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Describe the nature of fixed, variable, and marginal costs.
Topic: Costs of Production

135. Marginal cost is equal to the change in variable costs divided by the change in output.

Marginal cost is equal to the change in total costs divided by the change in output and since in the short run fixed costs are constant marginal cost is equal to variable cost changes divided by change in output.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Describe the nature of fixed, variable, and marginal costs.
Topic: Costs of Production

136. In the short run, if marginal cost is less than price for the last unit produced, the firm should expand output.

If the price is greater than the additional cost then the firm’s profit will rise if it expands output.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Illustrate the difference between production and investment decisions.
Topic: Supply Horizons

137. The choice of how intensively to use existing plant and equipment is a long-run investment decision.

The more intensively existing plant and equipment is used is related to the amount of variable inputs used and is therefore a short-run production decision.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Illustrate the difference between production and investment decisions.
Topic: Supply Horizons

138. Long-run choices imply that all factors are variable.

In the long run, all inputs are variable.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Illustrate the difference between production and investment decisions.
Topic: Supply Horizons

139. Investment decisions are long-run decisions.

Investment decisions involve changes in plant and equipment and are therefore long-run decisions.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Illustrate the difference between production and investment decisions.
Topic: Supply Horizons

140. Economic costs are the value of all resources used to produce a good or service.

Economic costs include monetary payments for resources and use of the firm’s own resources (non-monetary) that contribute to a firm’s ability to produce a good or service.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Discuss how accounting costs and economic costs differ.
Topic: Economic Versus Accounting Costs

141. Economic and accounting costs differ by the amount of explicit costs.

Economic and accounting costs differ by the amount of implicit costs.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Discuss how accounting costs and economic costs differ.
Topic: Economic Versus Accounting Costs

142. Economic costs include only the explicit payments made for a factor of production.

Economic costs include both implicit and explicit payments made for a factor of production.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Discuss how accounting costs and economic costs differ.
Topic: Economic Versus Accounting Costs

143. When implicit costs exist, economic profit will be less than accounting profit.

Implicit costs payments are not counted in accounting costs or accounting profit, but they are in economic profit. As a result, when they exist this will mean that economic profit is always lower as these additional costs act as an additional drag on economic profit.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Discuss how accounting costs and economic costs differ.
Topic: Economic Versus Accounting Costs

144. School subsidies and capital investment tax incentives are examples of government policy designed to increase productivity.

Spending on human capital increases productivity as workers with more knowledge are likely more able to produce more output per hour of work.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-01 Explain what the production function reveals.
Topic: Policy Perspectives

145. A firm's production function will shift downward if worker productivity increases.

A firm’s production function will shift upward if worker productivity increases.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-01 Explain what the production function reveals.
Topic: Policy Perspectives

146. When the marginal physical product curve shifts upward because of technological advances, the marginal cost curve shifts downward.

If marginal physical product increases, then marginal cost will decrease.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-01 Explain what the production function reveals.
Topic: Policy Perspectives

147. Why in the short run does marginal physical product increase but beyond some point start to decrease and eventually become negative?

At first when the fixed inputs are relatively plentiful, more intensive utilization of fixed inputs by variable inputs may increase the marginal physical product through specialization. However, beyond some point, each variable input has on average fewer units of the fixed input with which to work and the increase in intensity of use of the fixed input yields progressively less and less additional returns. Eventually, as variable inputs are added returns can become negative.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-02 Explain why the law of diminishing returns applies.
Topic: Costs of Production

148. Explain (a) how the firm’s total cost curve would change if the wage rate paid to the labors increases versus the effect when the firm’s property taxes are doubled? (b) What would happen to the firm’s profits assuming the revenue does not change? (c) What might the firm do in the long run verses the short run?

1. In the short run a wage increase would affect variable costs where as an increase in property taxes would affect fixed costs. A change in a variable cost would reduce output because the marginal cost would increase at each level of output and so to maximize profits a firm would cut back output so as to reduce marginal cost at or below the market price. A change in a fixed cost would not affect marginal costs and so the firm would keep the same production level.
2. Both changes would reduce profit but a change in variable costs would also reduce output.
3. In the long run if a firm’s ATC curve was still downward sloping it might want to increase fixed cost by using more efficient fixed inputs thereby increasing the efficiency of the variable inputs. If economic profits are less than zero the firm might want to exit the market.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-03 Describe the nature of fixed, variable, and marginal costs.
Topic: Costs of Production

149. What is the relationship between increasing returns to scale and decreasing long-run average total costs?

In the long run, when adding an additional unit of a capital increases the output per unit of labor input, then the same unit of output will cost less to produce since the additional cost of the input is spread over more of the output. As a result, the average total cost, which includes average variable costs, will decline.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-03 Describe the nature of fixed, variable, and marginal costs.
Topic: Costs of Production

150. What happens along the average total cost curve as: (a) Marginal product is increasing? (b) Marginal cost is decreasing? (c) Average variable costs are decreasing? (d) Total product increases at a decreasing rate?

1. When marginal product increases, average total costs would be falling because average fixed costs would be falling and average variable costs would also be falling because the inputs were becoming more efficient.
2. If the marginal cost of the next unit is less than the previous then average total costs will be decreasing.
3. Since average total cost is the sum of average fixed cost and average variable cost and since both would be falling so to would average total cost.
4. If total product was increasing at a decreasing rate, marginal physical product would be decreasing and marginal cost would be increasing at the point marginal cost was greater than average total cost, average total cost would start to increase.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-03 Describe the nature of fixed, variable, and marginal costs.
Topic: Costs of Production

151. (a) Distinguish between explicit and implicit costs and give an example of each. (b) Why would accounting profit be greater than or equal to economic profit?

1. Explicit costs are a monetary payment that a firm must pay to obtain a resource whereas implicit costs are the monetary income that a firm sacrifices when it uses a resource it owns rather than selling the resource on the open market.
2. Accounting profit only includes explicit costs whereas economic profit includes implicit cost and so economic profit will always be less than or equal to accounting profit when implicit costs exist.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Discuss how accounting costs and economic costs differ.
Topic: Economic Versus Accounting Costs

152. Within a given company, the question of how much can be produced is mostly a(n)

A. economic problem.

B. engineering problem.

C. managerial problem.

D. engineering problem and a managerial problem.

153. As more output is produced, a firms production cost rises. This will affect the firm’s _______decisions.

A. shutdown

B. production

C. demand

D. availability

154. Joe’s Bar and Grill hires six workers to prepare the meals in the kitchen for his restaurant. They are able to prepare on average 89 meals per day. If it hires another worker for the kitchen, the number of meals prepared increases to 94. As his business grows, he hires the eighth worker and the number of meals prepared decreases to 91 meals per day. How can you explain this in terms of productivity? How does the marginal physical product of his last worker affect Joe’s decisions? What could Joe do to make it feasible to hire the eighth worker at his business?

The additional production from the eighth worker is the marginal physical product. It decreases by 3 meals per day. Thus the marginal physical product is now negative with the eighth worker and it is not feasible to hire him. Joe actually has fewer meals prepared in his kitchen, possibly from the workers not having access to the cooking appliances when they need them. There are too many workers for his kitchen and it causes productivity to decrease to the point that output itself actually falls. Unless Joe is unable to expand the size of his kitchen, he will not employ the eighth worker. He may decide to use that eight worker in another part of his restaurant, serving customers, bartending, etc.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-02 Explain why the law of diminishing returns applies.
Topic: Capacity Constraints: The Production Function

155. Explain why fixed costs exist only in the short run but not in the long run.

The short run is too short of time for certain costs to change. Usually there are lease commitments that exist in the short run but are subject to change over time, for example. In the long run, the assumption is that enough time has passed such that firms can flexibly decide to do whatever they want.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Describe the nature of fixed, variable, and marginal costs.
Topic: Costs of Production

156. Given the following production costs for a bakery for September 2018:

Flour costs = $900, electricity = $550, employee wages = $4500, other ingredients = $400, rent = $1200, the usual standard city service fees = $60. The bakery produces and sells 6000 loaves of bread during the month of September.

a. What is the total cost of producing 6000 loaves of bread this month?

A. $7,610

B. $1.27

C. $0.21

D. $1.06

b. What are the average total costs per loaf of bread?

A. $7,610

B. $1.27

C. $0.21

D. $1.06

c. What are the average fixed costs per loaf of bread?

A. $7,610

B. $1.27

C. $0.21

D. $1.06

d. What are the average variable costs per loaf of bread?

A. $7,610

B. $1.27

C. $0.21

D. $1.06

157. Economic profit equals

A. total revenue minus explicit costs.

B. total revenue minus implicit costs.

C. total revenue minus explicit and implicit costs.

D. total revenue minus the difference between explicit and implicit costs.

158. A production function describes

A. the maximum amount of output attainable from a given combination of factor inputs.

B. the quantity of output demanded by consumers

C. the profits that result from various production outputs.

D. how management and labor work in cooperation to increase production.

159. Which of the following is a possible way to increase productivity?

A. greater levels of education

B. vocational training

C. increased capital investment

D. All of these choices are correct.

160. The selection of output in the short run is referred to as

A. the production function.

B. the production decision.

C. the production chain.

D. the investment decision.

161. You are cramming for a key economics exam, and your only concern is to earn the maximum possible grade, regardless of the cost. Accordingly, you should continue to study

A. until your marginal physical product starts to diminish.

B. as long as your marginal physical product is greater than zero.

C. only as long as your marginal physical product is greater than the average physical product.

D. only as long as average physical product is rising.

162. Average (total) costs are

A. total costs divided by number of inputs.

B. total costs divided by total output.

C. total costs divided by marginal productivity.

D. total costs divided by total revenue.

163. When more resources are added, the additional output that these resources produce decreases. This is called the

A. law of diminishing marginal utility.

B. law of diminishing returns.

C. law of demand.

D. law of supply.

164. As output increases, fixed costs

A. increase.

B. decrease.

C. do not change.

D. More information is needed to describe the response of fixed costs.

165. An average total cost curve is U-shaped because

A. specialization and the spreading of fixed costs initially contribute to declining average costs until diminishing returns set in.

B. it starts high, then falls, then rises again due to production decisions.

C. it is determined by dividing total revenue by total costs.

D. All of these choices are correct.

166. Which of these statements about variable costs is incorrect?

A. Variable costs increase as output increases.

B. Variable costs are equal to total costs minus fixed costs.

C. Variable costs occur even when there is no output.

D. Variable costs are associated with variable inputs.

167. You have just begun a lawn care business and have purchased one electric lawn mower, one trimmer, and one rake. You have hired two employees to help with the work. Why might you begin experiencing diminishing returns as you hire additional workers?

A. You do not have enough contracts to keep all your workers busy.

B. Lawn care jobs are seasonal.

C. You do not have sufficient capital resources to support the additional workers.

D. Both you do not have enough contracts and lawn care is seasonal.

168. Which of the following terms represents the cost of an additional unit of output?

A. total cost

B. average total cost

C. marginal cost

D. fixed cost

169. The investment decision involves

A. decisions in the long run.

B. the decision to buy or lease plants or equipment.

C. the decision to enter or exit an industry.

D. All of these choices are correct.

170. Which of the following is NOT a factor of production?

A. your economics professor

B. your college campus

C. your laptop computer

D. your money in the bank

171. Last year, Dr. Lopez quit his $100,000 job at the MegaMall Dental Clinic and opened his own dental practice. His revenue for the first year was $400,000. He paid $80,000 in rent for the dental office, $60,000 for his office manager’s salary, $25,000 for the dental hygienist, $150,000 for insurance, and $10,000 for other miscellaneous expenses. Based on this information, which of these statements is correct?

A. His implicit costs are $100,000.

B. His accounting profit is $75,000.

C. His economic profit is −$25,000.

D. All of these choices are correct.