2_Key Measures and Relationships

Question 1

___ is a cost paid in money, including labor, raw materials or other out-of-pocket expenses.

Answer 1

Explicit costs

Question 2

___ is an opportunity cost incurred by a firm when it uses a factor of production for which it does not make a direct monetary payment.

Answer 2

Implicit costs

Question 3

What are the two types of cost in ECON?

Answer 3

Explicit and implicit costs

Question 4

What are the two types of implicit costs?

Answer 4

Depreciation and normal costs

Question 5

___ is an opportunity cost of a firm using capital that it owns; measured in the market value of capital over a given period of time.

Answer 5

Depreciation costs

Question 6

___ is the return to entrepreneurship; the cost of the entrepreneur not running another firm.

Answer 6

Normal profit

Question 7

___ includes costs that vary with the level of production which include labor costs and raw materials.

Answer 7

Variable costs

Question 8

___ includes costs that do not change with the level or production which include replacements, new purchases, and land & infrastructure.

Answer 8

Fixed costs

Question 9

In the long run, all costs are ___.

Answer 9

Variable

Question 10

In the short run, all costs are ___.

Answer 10

Both fixed and variable

Question 11

___ refers to the human time used in the production process including skills and experience (human capital).

Answer 11

Labor

Question 12

___ refers to the machines used in the production process and allows labor to work on it and produce output.

Answer 12

Capital

Question 13

___ refers to any natural element used in the production process and includes raw materials, land, sun, air, etc.

Answer 13

Land (natural resources)

Question 14

___ is a change in the ability of a firm to produce a given level of output with a given quantity of inputs.

Answer 14

Technological change

Question 15

___ is the processes a firm uses to turn inputs into outputs of goods and services.

Answer 15

Technology

Question 16

___ shows the relationship between inputs employed and the maximum output of the firm; production.

Answer 16

Production function

Question 17

___ is the total quantity of a good produced in a given period.

Answer 17

Total product

Question 18

___ is the change in total product that results from one-unit increase in the quantity of labor employed; the contribution to total product of adding one more worker.

Answer 18

Marginal product

Question 19

___ occurs when the marginal product of an additional worker exceeds the marginal product of the previous worker leading to higher efficiency.

Answer 19

Law of increasing returns

Question 20

___ occurs when marginal product starts falling with an additional worker leading to inefficiency.

Answer 20

Law of diminishing returns

Question 21

___ is the total product per worker employed.

Answer 21

Average product

Question 22

___ is the cost of all the factors of production the firm uses (FC+VC).

Answer 22

Total cost

Question 23

___ is the cost of all a firm’s fixed factors of production used by a firm; do not change with output changes.

Answer 23

Total fixed costs

Question 24

___ is the cost of all variable factor of production used by a firm

Answer 24

Total variable costs

Question 25

___ is a firm’s change in cost that results from one-unit increase in total product; how much total cost changes as total product changes.

Answer 25

Marginal cost

Question 26

___ is the total cost divided by the unit of output.

Answer 26

Average cost

Question 27

___ is the total fixed cost per unit of output.

Answer 27

Average fixed cost

Question 28

___ is the total variable cost per unit of output.

Answer 28

Average variable cost

Question 29

___ is the total cost per unit of output.

Answer 29

Average total cost

Question 30

When a firm changes its plant size, its cost of producing a given output changes. Which of the following three outcomes might they might experience:

a. Economies of scale
b. Diseconomies of scale
c. Constant returns to scale

Answer 30

ALL

Question 31

___ occurs when a firm increases it’s plant size and labor employed by the same percentage, its output increases by a larger percentage and ATC decreases (specialization is the main source).

Answer 31

Economies of scale

Question 32

___ occurs when a firm increases it’s plant size and labor employed by the same percentage, it’s output increases by a smaller percentage and ATC increases (inefficient coordination).

Answer 32

Diseconomies of scale

Question 33

___ occurs when a firm increases it’s plant size and labor employed by the same percentage, it’s output increases by the same percentage and ATC remains constant.

Answer 33

Constant returns to scale

Question 34

___ shows the lowest cost at which a firm is able to produce a given quantity of output in the long run when no inputs are fixed; traces the lowest attainable ATC of producing each output.

Answer 34

LRATC curve

Long-run average total cost

Question 35

___ is the lowest level of output at which all economies of scale are exhausted.

Answer 35

Minimum efficiency scale

Question 36

___ occurs when a firm’s LRATC remains unchanged as it increases output.

Answer 36

Constant returns to scale

Question 37

___ are a curve showing all combinations of two inputs, such as capital and labor, that will produce the same level of output.

Answer 37

Isoquant lines

Question 38

The relationship known as ___ is the rate at which a firm can trade input for input hold output constant.

Answer 38

Marginal rate of technical substitutions

Question 39

___ are a graphical version of all the combinations of two inputs, such as capital and labor, that will produce the same level out output.

Answer 39

Isocost lines

Question 40

Costs are minimized when ___.

Answer 40

The marginal product per dollar spent is equalized across inputs in one of two situations:

1. More capital and less labor should be used in production
2. More labor and less capital should be used in production

Question 41

___ is the total monetary value of the goods and services hold.

Answer 41

Revenue

Question 42

___ is the difference between revenue and cost.

Answer 42

Profit

Question 43

You can conclude that a venture is worth pursuing if it results in an economic profit of ___.

Answer 43

0 or better

Question 44

You can conclude that a venture is worth pursuing if it results in an accounting profit of ___.

Answer 44

Higher than 0

Question 45

___ is the volume level that separates the range with economic loss from the range with economic profit.

Answer 45

Breakeven point

Question 46

A ___ is the relationship between price charged and the maximum unit quantity that could be sold.

Answer 46

Demand curve

Question 47

The Law of Demand states: ___.

Answer 47

Increase in price lead to decrease in demand

Decrease in price leads to increase in demand

Question 48

___ are the rate of change in the function value corresponding to a modest change in Q.

Answer 48

Marginal measures

Question 49

A general ___ principle states that the most profitable production level will be where marginal profit = 0.

Answer 49

Economic principle
(Unless there is a constraint preventing a change to a more profitable production level)

Question 50

A general ___ principle states that the most profitable production level will be where MR = MC.

Answer 50

Economic principle
(In the absence of production level constraints)

Question 51

The ___ rule states: if the selling price per unit is at least as large as the average variable cost per unit, the firm should continue to operate for at least a while; otherwise, the firm would be better to shut down operations immediately.

Answer 51

The shutdown rule

Question 52

What is an appropriate overall objective for most businesses?

Answer 52

Maximize economic profit

If a firm doesn’t make enough to cover at least their economic costs, they are losing money

Question 53

___ is the collective value of all economic profits into the future and approximately the amount the owners should expect to receive if they sold the business to a different set of owners.

Answer 53

The value of the firm

Question 54

Not-for-profit firms utilize ___ to determine the value of the firm.

Answer 54

Cost-benefit analysis

Question 55

Which of the following is the best example of a short run adjustment?

a. Smith University completed negotiations to acquire a large piece of land to build its new library.
b. Your local Wal-Mart hires two more associates.
c. A local bakery purchases another commercial oven as part of its capacity expansion.
d. Toyota builds a new assembly plant in Texas.

Answer 55

b. Your local Wal-Mart hires two more associates.

Question 56

Unlike an accountant, an economist measures costs on a(n) ________ basis.

a. replacement
b. explicit
c. conservative
d. historical

Answer 56

a. replacement

Forgone opportunity vs Opportunity taken

Question 57

When an economist uses the term “cost” referring to a firm, the economist refers to the

a. cost that can be actually verified and measured.
b. opportunity cost of producing a good or service, which includes both implicit and explicit cost.
c. implicit cost of producing a good or service but not the explicit cost of producing a good or service.
d. price of the good to the consumer.
e. explicit cost of producing a good or service but not the implicit cost of producing a good or service.

Answer 57

b. opportunity cost of producing a good or service, which includes both implicit and explicit cost.

Economic cost = Explicit + Implicit

Question 58

Accounting costs

a. usually include implicit costs.
b. are historical costs.
c. usually include normal profits.
d. are replacements costs.

Answer 58

b. are historical costs.

Actual “explicit” costs

Question 59

A firm earns a normal profit when its total revenues just offset both the ________ cost and ________ cost.

a. accounting; replacement
b. accounting; opportunity
c. explicit; accounting
d. historical; replacement

Answer 59

b. accounting; opportunity

Actual “explicit” costs and the costs of the forgone opportunity (you make just as much as you would’ve in forgone opportunity)

Question 60

If Melissa owns a software company that incurs no fixed costs, then

a. her total cost equals her total variable cost.
b. her total variable cost is less than her total cost.
c. her total cost equals zero.
d. she will earn an economic profit.
e. her marginal cost must equal zero.

Answer 60

a. her total cost equals her total variable cost.

TC = FC + VC

Question 61

In the short run, a firm cannot change the amount of capital it uses. Therefore the cost of capital is a

a. variable cost.
b. fixed cost.
c. productivity cost.
d. marginal cost.
e. short-run cost.

Answer 61

b. fixed cost.

Short run can be variable or fixed
Long run can only be variable

Question 62

Because the amount of labor a firm employs can be changed, the cost of labor is known as

a. variable cost.
b. an unavoidable cost.
c. fixed cost.
d. maximum cost.
e. minimum cost.

Answer 62

a. variable cost.

Question 63

Marginal cost equals

a. total cost minus total variable cost.
b. the change in total cost that results from a one-unit increase in output.
c. total fixed cost divided by total output.
d. total variable cost divided by total output.
e. the change in fixed cost that results from a one-unit increase in output.

Answer 63

b. the change in total cost that results from a one-unit increase in output.

Question 64

Lauren runs a chili restaurant in San Francisco. Her total revenue last year was $110,000. The rent on her restaurant was $48,000, her labor costs were $42,000, and her materials, food and other variable costs were $20,000. Lauren could have worked as a biologist and earned $50,000 per year. An economist calculates her implicit costs as

a. $50,000.
b. $0 because Lauren did not work as a biologist.
c. $110,000.
d. $150,000.
e. $63,000.

Answer 64

a. $50,000.
The cost of the opportunity that she forgoes

All others are actual “explicit” costs

Question 65

A factor of production that can be easily changed in the relevant time period is called a:

a. fixed input.
b. variable input.
c. temporary input.
d. substitution input.

Answer 65

b. variable input.