Principles of Economics 1 - Microeconomics
Quiz 6          
Due by 10 a.m., Tuesday, March 18, 2008.
Mr. Vice

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This quiz covers Chapter 7

____    1.   If Ripco owns the building where it operates, then if  (Hint:  Review the definition of opportunity cost)

a.

the firm pays no rent, there is no opportunity cost

b.

the firm does not rent the building to anyone else, there is no opportunity cost

c.

the firm pays no rent, there is an opportunity cost

d.

its usage of the building precludes it from renting to anyone else, there is an opportunity cost

e.

the firm could use the building for other things, there is no opportunity cost

____    2.   A firm's opportunity costs of using resources provided by the firm's owners are called (Hint:  See page 141)

a.

sunk costs

b.

fixed costs

c.

explicit costs

d.

implicit costs

e.

entrepreneurial costs

____    3.   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?  (Hint:  Review the definitions of implicit and explicit costs)

a.

explicit and implicit costs rise

b.

explicit costs rise; implicit costs fall

c.

explicit and implicit costs fall

d.

explicit costs fall; implicit costs rise

e.

not enough information is given

____    4.   Zipco's economic profit is equal to its

a.

total revenue minus accounting profit

b.

total revenue minus explicit costs

c.

total revenue plus accounting profit

d.

total revenue plus opportunity costs

e.

accounting profit minus implicit costs

____    5.   Normal profit is defined as

a.

accounting profit

b.

economic profit

c.

profit necessary to ensure that opportunity costs are covered

d.

accounting profit minus economic profit

e.

economic profit minus accounting profit

____    6.   Suppose a professor gives up her teaching job to devote her time to writing textbooks. If salaries of professors rise,

a.

her accounting profit will rise

b.

her accounting profit will fall

c.

her explicit costs will rise

d.

her economic profit from textbooks will fall

e.

her economic profit from textbooks will rise

____    7.   The short run is a period of time

a.

less than one year

b.

greater than one year

c.

during which all resources are variable

d.

during which at least one resource is fixed

e.

during which at least one resource is variable

____    8.   The additional output obtained by adding another unit of labor to the production process is called

a.

the marginal cost of labor

b.

the average output of labor

c.

a variable cost

d.

the marginal product of labor

e.

the marginal utility of labor

Exhibit 7-2

 

Labor

Total product

(pairs of shoes)

0

  0

1

20

2

50

3

75

4

80

5

75

____    9.   Given the information in Exhibit 7-2, what is the marginal product of the third unit of labor?

a.

45 pairs of shoes

b.

25 pairs of shoes

c.

15 pairs of shoes

d.

$45

e.

$25

____   10.   Increasing marginal returns are generally the result of

a.

diseconomies of scale

b.

increasing costs

c.

specialization and division of labor

d.

labor unions

e.

technology

____   11.   If a firm is experiencing diminishing marginal returns to labor, which of the following must be true?

a.

The first workers the firm hired were better than the workers hired later on.

b.

The firm is experiencing decreasing returns to scale.

c.

The positive effect of specialization in production is being offset by the negative effect of crowding of inputs.

d.

Output is decreasing.

e.

The firm should buy more nonlabor inputs.

____   12.   When diminishing marginal returns set in, total product

a.

is negative

b.

decreases at an increasing rate

c.

decreases at a decreasing rate

d.

increases at an increasing rate

e.

increases at a decreasing rate

____   13.   A variable cost is one that changes

a.

in the long run only

b.

in the short run only

c.

year to year

d.

month to month

e.

as output changes

____   14.   Which of the following statements is true? If the marginal product of labor diminishes, (Hint:  Assume that the price of labor is constant.  When the marginal product of labor diminishes, what happens to cost per unit?)

a.

average fixed cost rises

b.

average variable cost is constant

c.

marginal cost rises

d.

average total cost must rise

e.

total cost rises at a diminishing rate

Exhibit 7-7

 

____   15.   Fixed cost in Exhibit 7-7 equals  (Hint:  See page 148)

a.

$20

b.

$30

c.

$50

d.

$280

e.

we cannot calculate fixed cost

____   16.   A firm enters into a consent decree to avoid an even greater legal setback. If the terms of the consent decree effectively double the firm's fixed costs, then

a.

marginal cost more than doubles

b.

marginal cost doubles

c.

marginal cost remains unchanged

d.

average total cost remains unchanged

e.

average variable cost doubles

Exhibit 7-8

 

____   17.   In Exhibit 7-8, when output is 10,  (Hint:  Review the formulae (definitions) of each of the costs and do the calculations.  Most formulae are on page 149)

a.

total cost equals $10

b.

fixed cost equals $1

c.

total variable cost equals $10

d.

marginal cost equals $10

e.

fixed cost equals $10

____   18.   The shape of short-run variable cost curve is determined by  (Hint:  This the relationship is subtle, there is an inverse relationship between the productivity of inputs and costs per unit.  For example, for a given wage rate an increase in the productivity of labor results in a decrease in the cost per unit of output produced, so that both marginal and average costs are lowered.)

a.

the firm's effort to minimize cost

b.

the firm's effort to maximize profit

c.

competition in the industry

d.

the marginal productivity of the variable inputs the firm uses

e.

the money the firm spends

____   19.   The minimum efficient scale for a firm is the

a.

lowest rate of output at which long-run average cost is at a minimum

b.

lowest rate of output at which short-run average total cost is at a minimum

c.

lowest rate of output at which short-run average variable cost is at a minimum

d.

average of the rates of output at which long-run average cost is at a minimum

e.

average of the rates of output at which short-run average total cost is at a minimum

____   20.   If a firm triples all of its inputs and its output doubles, it is said to be experiencing (Hint:  If a firm were to double all of its inputs and output exactly doubled, then its cost per unit of output would not have changed and the firm would be experiencing constant returns to scale (neither economies nor diseconomies of scale.)  The concept of returns to scale applies when all resources are changed in the same proportion; for example, when all inputs are increased by 10 percent.  A change in marginal returns occurs when only one input is varied and all other inputs are held constant.

a.

diminishing marginal returns

b.

increasing marginal returns

c.

diseconomies of scale

d.

economies of scale

e.

constant average costs

 

Economics 1  Answers for Quiz 6

            1.   ANS:  D  Opportunity cost is the highest valued opportunity foregone or given up.  If using the building for their company causes the firm to give up the rent that the company could have received by renting to someone else, then the firm is incurring an opportunity cost that is at least equal to the rent foregone or given up.

            2.   ANS:  D 

            3.   ANS:  D

            4.   ANS:  E   Economic Profit i= Total Revenue - (Explicit cost + Implicit costs). 
Accounting Profit = Total Revenue - Explicit cost   Therefore, Accounting Profit minus Implicit costs is equal to economic profit.

            5.   ANS:  C.  A normal profit is being earned when the firm is receiving sufficient revenue to cover all of the out-of-pocket costs plus their opportunity costs.  Earning normal profit means that the firm is doing as well in this enterprise as in the next best alternative, so there is no reason to leave the industry and no reason for others to enter the industry.  Earning normal profit implies a stable situation in which no firm has an incentive to either leave or enter the industry.

            6.   ANS:  D   See the definition above for Economic Profit.  If the wage that she could have earned as a professor increases, then the implicit cost (opportunity cost) of writing books increases and economic profit decreases.  To calculate economic profit both implicit and explicit costs are deducted from the total revenue, so when one of the costs (in this case implicit cost) increases, a larger amount is deducted from total revenue and economic profit gets smaller.

            7.   ANS:  D

            8.   ANS:  D 

            9.   ANS:  B

           10.   ANS:  C

           11.   ANS:  C.  As more labor is used, there are gains from specialization; however, at some point the gains from specialization will be offset by the losses due to "resource crowding" which is having so much of the resource relative to other resources (inputs) that the marginal productivity of the resource is decreasing.  Imagine an acre of farm land with 1,000 workers.  Adding one more worker would probably not increase output.  Answer E is not a good answer because the solution may be to simply use less labor.

           12.   ANS:  E   Diminishing marginal returns means that the marginal product is getting smaller.  Marginal product is the amount that is added to total product as one one unit of input (land, labor, or capital) is added.  Therefore, a diminishing marginal product means that the rate at which total product is increasing is getting smaller and not that total product is getting smaller.  For total product to get smaller as more of an input is added, the marginal product of the input would have to be negative.  In other words, the more of the input is used, the smaller will be total product.

                        For example:  

Labor Total Product Marginal Product
0 0  
1 20 20
2 50 30
3 70 20
4 80 10
5 87 7

As the second unit of labor was added, there was increasing marginal productivity, but eventually (starting with the 3rd unit of labor) the marginal product began to decrease or diminish.  Note that total product continued to increase.

           13.   ANS:  E

           14.   ANS:  C

           15.   ANS:  C    Total Cost - Variable Cost = Fixed Cost or TC - VC = FC.  At 20 units of output we can see that TC - VC is equal to 50.

           16.   ANS:  C    Marginal Cost is a cost that varies with output, so an increase in fixed costs (which do not vary with output) will not affect the marginal cost.  Marginal cost is equal to the slope of the TC curve and an increase in fixed costs just shifts the TC curve up parallel to its original position.  Look at the diagram for question 15 to see this.

           17.   ANS:  C.  In the diagram A = MC, C = ATC, and B is the AVC curve.  At 10 units of output the ATC is $8.  ATC = TC/Q, so ATC x Q = TC.  TC = $8 x 10 units = $80.  AFC = ATC - AVC, so at 10 units of output $8 - $1 = $7.  AFC = FC/Q, so AFC x Q = FC and plugging in the numbers we get $7 x 10 units = $70.   TC = VC + FC, plugging in the known values we get $80 = $70 + FC.  Hence, FC must be $10.

           18.   ANS:  D   This question is answered on page 150 of your text -- second paragraph.

           19.   ANS:  A

           20.   ANS:    C  By tripling inputs, the total cost of production is tripled, while output is only doubled.  The conclusion is that the cost per unit produced has increased as the scale of production increased and this is a diseconomy of scale.