1. What is the amount of money that a firm receives from the sale of its output called?
a. total gross profit
b. total net profit
c. total revenue
d. net revenue
2. Susan used to work as a telemarketer, earning $25 000 per year. She gave up that job to start a catering
business. In calculating the economic profit of her catering business, how is the $25 000 income that she
gave up counted, in terms of the catering business?
a. total revenue
b. opportunity costs
c. explicit costs
d. sunk costs
3. What would be an example of an explicit cost of production?
a. the cost of forgone labour earnings for an entrepreneur
b. the lost opportunity to invest in other capital markets when the money is invested in one's
c. the cost of flour for a baker
d. the cost of training programs postponed indefinitely
Joe wants to start his own business. The business he wants to start will require that he purchase a factory
that costs $300 000. To finance this purchase, he will use $100 000 of his own money, on which he has
been earning 10 percent interest per year. In addition, he will borrow $200 000, and he will pay 12
percent interest per year on that loan.
4. Refer to Scenario 13-1. For the first year of operation, what is the explicit cost of purchasing the factory?
a. $12 000
b. $20 000
c. $24 000
d. $44 000
5. Refer to Scenario 13-1. For the first year of operation, what is the opportunity cost of purchasing the factory?
a. $10 000
b. $20 000
c. $24 000
d. $34 000
6. What relationship does a production function measure?
a. inputs and quantity of output
b. inputs and revenue
c. inputs and costs
d. inputs and profit
7. What can the marginal product of labour be defined as?
a. change in profit ÷ change in labour
b. change in output ÷ change in labour c. change in labour ÷ change in output
d. change in labour ÷ change in total cost
8. Suppose adding another unit of labour leads to an increase in output that is smaller than increases in output
that resulted from adding previous units of labour. What property does this suggest?
a. diminishing labour
b. diminishing output
c. diminishing marginal product
d. negative marginal product
The figure below depicts a total cost function for a firm that produces cookies.
9. Refer to Figure 13-1. What does the changing slope of the total cost curve reflect?
a. decreasing average variable cost
b. decreasing average total cost
c. decreasing marginal product
d. increasing fixed cost
10. Refer to Figure 13-1. Which of the following statements is most consistent with the shape of the total cost
a. Producing an additional cookie is always more costly than producing the previous cookie.
b. Total production of cookies decreases with additional units of input.
c. Producing additional cookies is equally costly, regardless of how many cookies are
already being produced.
d. Producing additional cookies becomes increasingly costly only when the number of
cookies already being produced is large.
11. Assume a certain firm regards the number of workers it employs as variable, and that it regards the size of its
factory as fixed. When is this assumption often realistic?
a. in the short run, but not in the long run
b. in the long run, but not in the short run
c. both in the short run and in the long run
d. neither in the short run nor in the long run 12. When a firm's only variable input is labour, what does the slope of the production function measure?
a. the quantity of labour
b. the quantity of output
c. the total cost
d. the marginal product of labour
13. Let L represent the number of workers hired by a firm and let Q represent that firm's quantity of output.
Assume two points on the firm's production function are (L = 12, Q = 122) and (L = 13, Q = 130). What is
the marginal product of the 13th worker?
a. 8 units of output
b. 10 units of output
c. 122 units of output
d. 130 units of output
14. On a 100-acre farm, a farmer is able to produce 3000 bushels of wheat when he hires 2 workers. He is able to
produce 4400 bushels of wheat when he hires 3 workers. Which of the following possibilities is consistent
with the property of diminishing marginal product?
a. The farmer is able to produce 5600 bushels of wheat when he hires 4 workers.
b. The farmer is able to produce 5800 bushels of wheat when he hires 4 workers.
c. The farmer is able to produce 6000 bushels of wheat when he hires 4 workers.
d. The farmer is able to produce 6200 bushels of wheat when he hires 4 workers.
15. What distinguishes short-run cost analysis fromlong-run cost analysis for a profit-maximizing firm in the
a. Output is not variable.
b. The number of workers used to produce the firm's product is fixed.
c. The size of the factory is fixed.
d. There are no fixed costs.
16. What is the cost of producing the typical unit of output?
a. the firm's average total cost
b. the firm's opportunity cost
c. the firm's variable cost
d. the firm's marginal cost
17. What is the amount by which total cost rises when the firm produces one additional unit of output called?
a. average cost
b. marginal cost
c. fixed cost
d. variable cost
A firm experiences decreasing marginal product of labour with the addition of each worker regardless of
the current output level.
18. Refer to Scenario 13-2. How will average total cost behave?
a. It will always rise.
b. It will always fall.
c. It will be U-shaped, first falling, then rising.
d. It will remain constant. 1