John moved his office from a building he was renting downtown to the carriage house he owns in back of his house. How will his costs change?

1. explicit and implicit costs rise
2. explicit costs rise; implicit costs fall
3. explicit and implicit costs fall
4. explicit costs fall; implicit costs rise
5. not enough information is given

Answer: D

A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job, which pays $20,000 a year, and take over a store building that he owns and currently rents to his brother for $6,000 a year. His expenses at the sushi bar would be $50,000 for food and $2,000 for gas and electricity. What are his explicit costs?

1. $26,000
2. $66,000
3. $78,000
4. $52,000
5. $72,000

Answer: D

A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job, which pays $20,000 a year, and take over a store building that he owns and currently rents to his brother for $6,000 a year. His expenses at the sushi bar would be $50,000 for food and $2,000 for gas and electricity. What are his implicit costs?

1. $26,000
2. $66,000
3. $78,000
4. $52,000
5. $72,000

Answer: A

Economic profit is defined as

1. total revenue minus implicit costs
2. total revenue plus explicit costs
3. total revenue plus implicit costs
4. wages plus interest minus rent
5. total revenue minus implicit and explicit costs

Answer: E

Which of the following would be shown on IBM's accounting statement?

1. revenue, implicit costs, explicit costs, and economic profit
2. revenue, implicit costs, explicit costs, and accounting profit
3. revenue, explicit costs, and economic profit
4. revenue, explicit costs, and accounting profit
5. revenue, implicit costs, and accounting profit

Answer: D

Sally owns a small business that she operates in a small building she owns. Given the information in Exhibit 7-1, Sally's accounting profit is

1. $80,000
2. $50,000
3. $65,000
4. $35,000
5. $24,000

Answer: C

Sally owns a small business that she operates in a small building she owns. Given the information in Exhibit 7-1, Sally's economic profit is

1. $80,000
2. $50,000
3. $65,000
4. $35,000
5. $24,000

Answer: E

Inputs that can be increased or decreased in the short run are called

1. fixed inputs
2. variable inputs
3. economic inputs
4. accounting inputs
5. normal inputs

Answer: B

The short run is a period of time

1. equal to or less than six months
2. during which all resources may be varied
3. during which all resources are fixed
4. during which at least one resource is fixed
5. during which at least one resource may be varied

Answer: D

Which of the following is most likely to be a fixed resource for the Speedy Word Processing and Résumé Company?

1. floppy disks
2. typists
3. computer terminals
4. electricity
5. paper

Answer: C

The long run is a period of time

1. during which at least one resource is fixed
2. during which all resources are variable
3. during which all resources are fixed
4. less than one year
5. greater than one year

Answer: B

Marginal product is defined as

1. the increase in revenue that occurs when an additional unit of a resource is added
2. the increase in output that occurs when all resources are increased by the same proportion
3. the increase in output that occurs when an additional unit of a resource is added, holding all other resources constant
4. the amount of additional resources needed to increase output by one unit when all resources are increased by the same amount
5. the amount of additional money needed to increase output by one unit when all resources are held constant

Answer: C

Given the information in Exhibit 7-2, what is the marginal product of the third unit of labor?

1. 45 pairs of shoes
2. 25 pairs of shoes
3. 15 pairs of shoes
4. $45
5. $25

Answer: B

Given the information in Exhibit 7-2, at what point do diminishing marginal returns set in?

1. before the first unit of labor
2. between the first and second units of labor
3. between the second and third units of labor
4. between the third and fourth units of labor
5. between the fourth and fifth units of labor

Answer: C

Increasing marginal returns are generally the result of

1. diseconomies of scale
2. increasing costs
3. specialization and division of labor
4. labor unions
5. technology

Answer: C

If a firm is experiencing diminishing marginal returns to labor, which of the following must be true?

1. The first workers the firm hired were better than the workers hired later on.
2. The firm is experiencing decreasing returns to scale.
3. The positive effect of specialization in production is being offset by the negative effect of crowding of inputs.
4. Output is decreasing.
5. The firm should buy more nonlabor inputs.

Answer: C

The law of diminishing marginal returns states that

1. long-run average cost declines as output increases
2. if the marginal product is above the average product, the average will rise
3. as units of a variable input are added to a given amount of fixed inputs, the marginal product of the variable input eventually diminishes
4. as a person consumes more of a good, the marginal satisfaction from that good eventually diminishes
5. if marginal product is positive, total product rises

Answer: C

When diminishing marginal returns set in, total product

1. is negative
2. decreases at an increasing rate
3. decreases at a decreasing rate
4. increases at an increasing rate
5. increases at a decreasing rate

Answer: E

Which of the following is most likely to be a fixed cost for any firm?

1. the monthly electric bill
2. sales taxes
3. shipping and postage costs
4. rent on office space
5. charitable donations

Answer: D

A variable cost is one that changes

1. in the long run only
2. in the short run only
3. year to year
4. month to month
5. as output changes

Answer: E

For a person who owns and operates an automobile, insurance premiums are a __________ and maintenance and repairs are a __________.

1. revenue; cost
2. fixed cost; fixed cost
3. variable cost; variable cost
4. variable cost; fixed cost
5. fixed cost; variable cost

Answer: E

Fixed costs are defined as

1. the total costs of a firm's production
2. the additional cost of the last unit produced
3. costs that increase proportionately as the quantity produced increases
4. costs that do not vary as quantity produced increases
5. implicit costs only

Answer: D

What is true of marginal cost when marginal returns are increasing?

1. It is zero.
2. It is negative.
3. It is increasing.
4. It is decreasing.
5. It has a constant slope.

Answer: D

What is true of marginal cost when marginal returns are decreasing?

1. It is zero.
2. It is negative.
3. It is increasing.
4. It is decreasing.
5. It has a constant slope.

Answer: C

What is the relationship between marginal cost and marginal product?

1. The two are not related.
2. When marginal product increases, marginal cost increases.
3. When marginal product increases, marginal cost falls.
4. When marginal product is negative, marginal costs are negative.
5. When diminishing marginal returns set in, marginal costs fall.

Answer: C

In Exhibit 7-5, what is fixed cost at 20 units of output?

1. $0
2. $10
3. $40
4. it is impossible to calculate fixed cost unless we know the daily wage
5. it is impossible to calculate fixed cost unless we know variable cost at Q = 15

Answer: B

In Exhibit 7-5, what is variable cost when no output is being produced?

1. $0
2. $10
3. infinity
4. it is impossible to calculate variable cost unless we know the daily wage
5. it is impossible to calculate variable cost unless we know fixed cost at Q = 0

Answer: A

In Exhibit 7-5, what are variable costs at 15 units of output?

1. $30
2. $10
3. $1
4. $20
5. it is impossible to calculate variable cost unless we know the daily wage

Answer: D

In Exhibit 7-5, what is the marginal cost of the 15th unit of output

1. $30
2. $10
3. $1
4. $20
5. it is impossible to calculate marginal cost unless we know the daily wage

Answer: C

When marginal product is decreasing, marginal cost is

1. less than zero
2. equal to zero
3. constant
4. decreasing
5. increasing

Answer: E

The average total cost curve and the average variable cost curve

1. are closer together as output increases, with average variable cost reaching its minimum level first
2. are closer together as output increases, with average total cost reaching its minimum level first
3. are farther apart as output increases, with average variable cost reaching its minimum level first
4. are farther apart as output increases, with average total cost reaching its minimum level first
5. are parallel to each other, and reach their minimum levels at the same rate of output

Answer: A

If the average height in the classroom were 5 feet 10 inches and Patrick Ewing, who is 7 feet tall, came in and sat down,

1. the average height would rise to 7 feet
2. the marginal height would be 5 feet 10 inches
3. the average height would not change
4. the average height would rise somewhat
5. the marginal height would rise

Answer: D

Which of the following correctly describes the relationship between the marginal cost and average variable cost curves?

1. MC is everywhere above AVC
2. AVC is everywhere above MC
3. MC crosses AVC at AVC's minimum point
4. MC crosses AVC at MC's minimum point
5. both AVC and MC first rise and then fall

Answer: C

If marginal cost exceeds average variable cost,

1. average variable cost is negative
2. average variable cost is increasing
3. marginal cost is greater than average total cost
4. average variable cost is decreasing
5. average fixed cost is increasing

Answer: B

If marginal cost is less than average total cost,

1. marginal cost must be falling
2. average total cost must be increasing
3. average variable cost equals average total cost
4. average variable cost must be decreasing
5. average variable cost may be increasing or decreasing

Answer: E

Which of the following is true of the MC curve?

1. It intersects the ATC curve at its minimum, but it does not intersect the AVC curve at its minimum.
2. It intersects the AVC curve at its minimum, but it does not intersect the ATC curve at its minimum.
3. It intersects both the ATC and the AVC curves at their minimums.
4. It intersects both the ATC and the AFC curves at their minimums.
5. It intersects both the AVC and the AFC curves at their minimums.

Answer: C

The marginal cost curve intersects the average total cost curve (ATC)

1. at the ATC's minimum point
2. only when the ATC is sloping upward
3. at the ATC's maximum point
4. only when the ATC is sloping downward
5. when the ATC intersects the fixed cost curve

Answer: A

The shape of the long-run average cost curve reflects

1. market demand
2. economies and diseconomies of scale
3. increasing and diminishing marginal returns
4. productivity of fixed inputs
5. all of the above

Answer: B

Economies of scale occur where

1. long-run average cost falls as new firms enter the industry
2. short-run average cost falls as new firms enter the industry
3. long-run average cost falls as one firm expands plant size
4. short-run average cost falls as one firm expands plant size
5. long-run average cost rises as one firm expands plant size

Answer: C

Which economic concept explains why a large drugstore chain can produce at a lower average cost than Whoville Pharmacy, an individually owned drugstore?

1. increasing marginal returns
2. diminishing marginal returns
3. economies of scale
4. diseconomies of scale
5. constant returns to scale

Answer: C

Doubling the circumference of an oil pipeline more than doubles the volume of oil that can be pumped through. This is an example of

1. production inefficiency
2. diminishing marginal returns
3. diseconomies of scale
4. constant returns to scale
5. economies of scale

Answer: E

For building contractors, doubling the size of an office building does not require double the inputs because there are common walls. This is an example of

1. increasing marginal product
2. diminishing marginal returns
3. economies of scale
4. diseconomies of scale
5. constant returns to scale

Answer: C

The minimum efficient scale for a firm is the

1. lowest rate of output at which long-run average cost is at a minimum
2. lowest rate of output at which short-run average total cost is at a minimum
3. lowest rate of output at which short-run average variable cost is at a minimum
4. average of the rates of output at which long-run average cost is at a minimum
5. average of the rates of output at which short-run average total cost is at a minimum

Answer: A

If General Electric finds that when it doubles both its plant size and the amount of associated inputs, its output level does not double, then

1. the law of diminishing returns is in effect
2. long-run average costs must be decreasing
3. the firm is experiencing diseconomies of scale
4. the firm should increase production
5. the firm is experiencing constant returns to scale

Answer: C

As output increases, diseconomies of scale

1. lead to rising long-run average costs
2. lead to declining long-run average costs
3. lead to rising short-run average total costs
4. lead to declining short-run total cost
5. means the law of diminishing marginal returns is affecting production

Answer: A