LESSON 2 MIDTERMS

Question 1

Is an entity that employs resources, or
factors of production, to produce goods and services to be
sold to consumers, other firms, or the government.

Answer 1

business firm

Question 2

No one orders buyers to increase quantity demanded when the price
increases; they just do it. TRUE OR FALSE

Answer 2

FALSE (REDUCE)

Question 3

it guides individuals from production of one good into
the production of another. It also coordinates individuals’ actions so that suppliers and
demanders find mutual satisfaction at equilibrium.

Answer 3

The Market

Question 4

As economist Adam Smith observed, individuals in market setting
are ”led by an?

Answer 4

invisible hand

Question 5

the process in which individuals perform tasks,
such as producing certain quantities of goods, based on changes in
market forces such as supply, demand, and price

Answer 5

Market coordination

Question 6

the process in which managers direct
employees to perform certain tasks.

Answer 6

Managerial coordination

Question 7

They suggest that
firms are formed when benefits can be obtained from
individuals working as a team.

Answer 7

Armen Alchian and Harold Demsetz

Question 8

Sum of team production > Sum of individual production. TRUE OR FALSE

Answer 8

TRUE

Question 9

occurs when workers put forth less than the agreed-to
effort.

Answer 9

Shirking

Question 10

plays an important role in the firm. The they reduces the amount of shirking by firing shirkers and
rewarding productive members

Answer 10

Monitor (manager)

Question 11

is a person who shares in the profits of a
business firm.

Answer 11

residual claimant

Question 12

two sides to every business firm

Answer 12

1. Revenue Side
2. Cost Side

Question 13

The firm’s objective is to maximize profit. TRUE OR FALSE

Answer 13

TRUE

Question 14

FORMULA TO GET THE PROFIT

Answer 14

Profit = Total Revenue – Total Cost

Question 15

cost incurred when an actual (Monetary)
payment is made, such as payment for resources bought and
rented

Answer 15

Explicit Cost

Question 16

cost that represents the value of resources
used in production for which no actual (monetary) payment
is made, such as opportunity costs

Answer 16

Implicit Cost

Question 17

the difference
between total revenue and explicit costs

Answer 17

Accounting Profit

Question 18

the difference between
total revenue and total cost (both explicit
and implicit)

Answer 18

Economic Profit

Question 19

A firm that makes zero economic profit is said to be earning
abnormal profit. TRUE OR FALSE

Answer 19

FALSE (NORMAL)

Question 20

is a transformation of resources or inputs into
goods and services

Answer 20

Production

Question 21

input whose quantity cannot be changed as output
changes

Answer 21

Fixed input

Question 22

input whose quantity can be changed as output
changes

Answer 22

Variable input

Question 23

If any of the firm’s inputs are fixed, it is said to be producing in
the long run. TRUE OR FALSE

Answer 23

FALSE (SHORT-RUN)

Question 24

the change in output that
results in changing the variable input by one unit, holding all
other inputs fixed

Answer 24

Marginal Physical Product

Question 25

as ever larger
amounts of a variable input are combined with fixed inputs,
eventually the marginal physical product of the variable
input will decline.

Answer 25

Law of Diminishing Marginal Returns

Question 26

Marginal cost of producing a good
is a reflection of the marginal physical product of the variable input. TRUE OR FALSE

Answer 26

TRUE

Question 27

is the cost that does not vary with output; it is the cost associated
with fixed inputs

Answer 27

Fixed cost

Question 28

is the cost that varies with output; it is the cost associated with
variable inputs

Answer 28

Variable cost

Question 29

Is the sum of fixed costs and variable costs

Answer 29

Total cost

Question 30

is the change in total cost that results from a change in
output

Answer 30

Marginal cost

Question 31

As MPP rises, expect costs to rise. As MPP declines,
expect costs to decline. TRUE OR FALSE

Answer 31

FALSE

Question 32

MPP and MC move in opposite directions. TRUE OR FALSE

Answer 32

TRUE

Question 33

When MC is above average, the average rises. When MC
is below average, average decreases. TRUE OR FASLE

Answer 33

TRUE

Question 34

When MPP decreases what happens to Mc?

Answer 34

MC increase

Question 35

is a cost incurred in the past that cannot be
changed by current decisions and therefore cannot be
recovered.

Answer 35

Sunk Cost