Mankiw7e TB Ch13 (001-060)

The Costs of Production
Multiple Choice – Section 00: Introduction
1. Analyzing the behavior of the firm enhances our understanding of

a. what decisions lie behind the market supply curve.
b. how consumers allocate their income to purchase scarce resources.
c. how financial institutions set interest rates.
d. whether resources are allocated fairly.
ANSWER: a
POINTS: 1
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: ECON.MANK.15.64 - LO: 13-0
NATIONAL STANDARDS: United States - BUSPROG: Analytic
TOPICS: DISC: Producer Theory Production and Cost
KEYWORDS: BLOOM'S: Application
2. A student might describe information about the costs of production as

a. dry and technical.
b. boring.
c. crucial to understanding firms and market structures.
d. All of the above could be correct.
ANSWER: d
POINTS: 1
KEYWORDS: BLOOM'S: Comprehension
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3184 The Costs of Production
3. Which field of economics studies how the number of firms affects the prices in a market and the
efficiency of market outcomes?
a. macroeconomics
b. industrial organization
c. labor economics
d. monetary economics
ANSWER: b
POINTS: 1I
TOPICS: DISC: Producer Theory
KEYWORDS: BLOOM'S: Knowledge
4. Economists in the field of industrial organization study how

a. central banking policies affect financial markets.
b. firms’ demand for labor and individuals’ supply of labor affect resource markets.
c. firms’ decisions about prices and quantities depend on market conditions.
d. externalities and public goods affect the environment.
ANSWER: c
POINTS: 1
The Costs of Production 3185
5. Industrial organization is the study of

a. how labor unions organize workers in industries.
b. which managers are the most successful.
c. how industries organize for political advantage.
d. how firms' decisions regarding prices and quantities depend on the market conditions they face.
ANSWER: d
POINTS: 1
NOTES: r
6. To an economist, the field of industrial organization answers which of the following questions?
a. Why are consumers subject to the law of demand?
b. Why do firms experience diminishing marginal productivities of their inputs?
c. How does the number of firms affect prices and the efficiency of market outcomes?
d. How can government intervention improve industrial production when externalities are present?
ANSWER: c
POINTS: 1
NOTES: r
Multiple Choice – Section 01: What Are Costs?
1. Economists assume that the typical person who starts her own business does so with the intention
of
a. donating the profits from her business to charity.
b. capturing the highest number of sales in her industry.
c. maximizing profits.
d. minimizing costs.
ANSWER: c
POINTS: 1
TOPICS: DISC: Thinking Like an Economist
2. Economists normally assume that the goal of a firm is to

(i) sell as much of its product as possible.
(ii) set the price of the product as high as possible.
(iii) maximize profit.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (iii) only
d. (i), (ii), and (iii)
ANSWER: c
POINTS: 1
DIFFICULTY: Difficulty: Moderate
TOPICS: DISC: Profit Maximization
3. Economists normally assume that the goal of a firm is to earn

(i) profits as large as possible, even if it means reducing output.
(ii) profits as large as possible, even if it means incurring a higher total cost.
(iii) revenues as large as possible, even if it reduces profits.
b. (i) and (iii) only
c. (ii) and (iii) only
ANSWER: a
POINTS: 1
TOPICS: DISC: Profit Maximization

(i) earn profits as large as possible, even if it means reducing output.
(ii) earn revenues as large as possible, even if it means reducing profits.
(iii) minimize costs, regardless of profits.
a. (i) only
b. (i) and (ii) only
ANSWER: a
POINTS: 1
NOTES: r
5. An entrepreneur’s motivation to start a business arises from

a. an innate love for the type of business that he or she starts.
b. a desire to earn a profit.
c. an altruistic desire to provide the world with a good product.
d. All of the above could be correct.
ANSWER: d
POINTS: 1

a. maximize its total revenue.
b. maximize its profit.
c. minimize its explicit costs.
d. minimize its total cost.
ANSWER: b
POINTS: 1
7. Economists assume that the goal of the firm is to maximize total

a. revenue.
b. profits.
c. costs.
d. satisfaction.
ANSWER: b
POINTS: 1
8. When a firm is making a profit-maximizing production decision, which of the following principles of
economics is likely to be most important to the firm's decision?
a. The cost of something is what you give up to get it.
b. A country's standard of living depends on its ability to produce goods and services.
c. Prices rise when the government prints too much money.
d. Governments can sometimes improve market outcomes.
ANSWER: a
POINTS: 1
9. The amount of money that a firm receives from the sale of its output is called
a. total gross profit.
b. total net profit.
c. total revenue.
d. net revenue.
ANSWER: c
POINTS: 1
10. Total revenue equals

a. price x quantity.
b. price/quantity.
c. (price x quantity) - total cost.
d. output - input.
ANSWER: a
POINTS: 1
11. Total revenue equals

a. marginal revenue - marginal cost.
b. price/quantity.
c. price x quantity.
d. output - input.
ANSWER: c
POINTS: 1
NOTES: r
12. Which of the following can be added to profit to obtain total revenue?
a. net profit
b. capital profit
c. operational profit
d. total cost
ANSWER: d
POINTS: 1
KEYWORDS: BLOOM'S: Analysis
13. If Danielle sells 300 wrist bands for $0.50 each, her total revenues are
a. $150.
b. $299.50.
c. $300.
d. $600.
ANSWER: a
POINTS: 1
NOTES: r
14. If Kevin’s children run a lemonade stand for a day and sell 200 glasses of lemonade at $0.50
each, their total revenues are
a. $100.
b. $199.50.
c. $200.
d. $400.
ANSWER: a
POINTS: 1
NOTES: r
15. Carol Anne makes candles. If she charges $20 for each candle, her total revenue will be
a. $1,000 if she sells 100 candles.
b. $500 if she sells 25 candles.
c. $20 regardless of how many candles she sells.
d. $200 if she sells 5 candles.
ANSWER: b
POINTS: 1
NOTES: r
16. The Carolina Christmas Tree Corporation grows and sells 500 Christmas trees. The average cost
of production per tree is $50. Each tree sells for a price of $65. The Carolina Christmas Tree
Corporation’s total revenues are
a. $7,500.
b. $25,000.
c. $32,500.
d. $67,500.
ANSWER: c
POINTS: 1
NOTES: r
17. Tsintah weaves traditional Navaho rugs. She weaves and sells 50 rugs. Her average cost of
production per rug is $50. She sells each rug for a price of $65. Tsintah’s total revenues are
a. $750.
b. $2,500.
c. $3,250.
d. $5,750.
ANSWER: c
POINTS: 1
NOTES: n
18. The Three Amigo’s company produced and sold 500 dog beds. The average cost of production
per dog bed was $50. Each dog be sold for a price of $65. The Three Amigo’s total costs are
a. $7,500.
b. $25,000.
c. $32,500.
d. $67,500.
ANSWER: b
POINTS: 1
NOTES: r
19. Trevor’s Tire Company produced and sold 500 tires. The average cost of production per tire was
$50. Each tire sold for a price of $65. Trevor’s Tire Company’s total profits are
a. $7,500.
b. $25,000.
c. $32,500.
d. $67,500.
ANSWER: a
POINTS: 1
20. Stick Storage manufactures and sells computer flash drives. Last year it sold 2 million flash drives
at a price of $10 each. For last year, the firm's
a. accounting profit was $20 million.
b. economic profit was $20 million.
c. total revenue was $20 million.
d. explicit costs was $20 million.
ANSWER: c
POINTS: 1
NOTES: r
21. Shelley’s Salsa produces and sells organic salsa. Last year it sold 3 million tubs of salsa at a price
of $3 per tub. For last year, the firm's
a. accounting profit was $9 million.
b. economic profit was $9 million.
c. total revenue was $9 million.
d. explicit costs were $9 million.
ANSWER: c
POINTS: 1
NOTES: r
22. A dairy produces and sells organic milk. Last year it sold 500,000 gallons of milk at a price of $7
per gallon. For last year, the firm's
a. total revenue was $3.5 million.
b. economic profit was $3.5 million.
c. accounting profit was $3.5 million.
d. explicit costs were $3.5 million.
ANSWER: a
POINTS: 1
NOTES: n
23. Bubba is a shrimp fisherman who catches 4,000 pounds of shrimp per year. He can sell the shrimp
for $5 per pound. His average total cost of catching shrimp is $3 per pound. Bubba’s annual total
revenue is
a. $8,000.
b. $12,000.
c. $20,000.
d. $32,000.
ANSWER: c
POINTS: 1
24. The amount of money that a firm pays to buy inputs is called
a. total cost.
b. variable cost.
c. marginal cost.
d. fixed cost.
ANSWER: a
POINTS: 1
25. Total cost is the

a. amount a firm receives for the sale of its output.
b. fixed cost less variable cost.
c. market value of the inputs a firm uses in production.
d. quantity of output minus the quantity of inputs used to make a good.
ANSWER: c
POINTS: 1
26. Profit is defined as

a. net revenue minus depreciation.
b. total revenue minus total cost.
c. average revenue minus average total cost.
d. marginal revenue minus marginal cost.
ANSWER: b
POINTS: 1
27. Profit is defined as total revenue

a. plus total cost.
b. times total cost.
c. minus total cost.
d. divided by total cost.
ANSWER: c
POINTS: 1
28. Marcus sells 300 candy bars at $0.50 each. His total costs are $125. His profits are
a. $25.
b. $124.50.
c. $125.
d. $150.
ANSWER: a
POINTS: 1
NOTES: r
29. Ryan sells 200 plastic ball point pens at $0.50 each. His total costs are $25. His profits are
a. $25.
b. $75.
c. $100.
d. $175.
ANSWER: b
POINTS: 1
NOTES: r
30. Billy’s Bean Bag Emporium produced 300 bean bag chairs but sold only 275 of the units it
produced. The average cost of production for each unit of output produced was $100. The price
for each of the 275 units sold was $95. Total profit for Billy’s Bean Bag Emporium would be
a. -$3,875.
b. $26,125.
c. $28,500.
d. $30,000.
ANSWER: a
POINTS: 1
31. The things that must be forgone to acquire a good are called
a. implicit costs.
b. opportunity costs.
c. explicit costs.
d. accounting costs.
ANSWER: b
POINTS: 1
TOPICS: DISC: Thinking Like an Economist Opportunity Cost
32. A firm's opportunity costs of production are equal to its

a. explicit costs only.
b. implicit costs only.
c. explicit costs + implicit costs.
d. explicit costs + implicit costs + total revenue.
ANSWER: c
POINTS: 1
33. Jamar used to work as an office manager, earning $40,000 per year. He gave up that job to start a
life-coaching business. In calculating the economic profit of his life-coaching business, the $40,000
income that he gave up is counted as part of the life-coaching business's
a. total revenue.
b. opportunity costs.
c. explicit costs.
d. marginal costs.
ANSWER: b
POINTS: 1
NOTES: r
34. Kelly has decided to start his own business giving sailing lessons. To purchase equipment for the
business, Kelly withdrew $1,000 from his savings account, which was earning 3% interest, and
borrowed an additional $2,000 from the bank at an interest rate of 7%. What is Kelly's annual
opportunity cost of the financial capital that has been invested in the business?
a. $30
b. $140
c. $170
d. $300
ANSWER: c
POINTS: 1
DIFFICULTY: Difficulty: Challenging
NOTES: r
35. Gwen has decided to start her own photography studio. To purchase the necessary equipment,
Gwen withdrew $2,000 from her savings account, which was earning 3% interest, and borrowed
an additional $4,000 from the bank at an interest rate of 7%. What is Gwen's annual opportunity
cost of the financial capital that has been invested in the business?
a. $60
b. $280
c. $340
d. $660
ANSWER: c
POINTS: 1
NOTES: r
36. Anya has decided to start her own hair-styling salon. To purchase the necessary equipment,
Anya withdrew $10,000 from her savings account, which was earning 3% interest, and borrowed
an additional $5,000 from the bank at an interest rate of 8%. What is Anya's annual opportunity
cost of the financial capital that has been invested in the business?
a. $300
b. $400
c. $700
d. $1,650
ANSWER: c
POINTS: 1
NOTES: r
37. Bubba is a shrimp fisherman who used $2,000 from his personal savings account to buy a boat
and equipment for his shrimp business. The savings account paid 2% interest. What is Bubba’s
annual opportunity cost of the financial capital that he invested in his business?
a. $20
b. $40
c. $200
d. $400
ANSWER: b
POINTS: 1
38. Bubba is a shrimp fisherman who could earn $5,000 as a fishing tour guide. Instead, he is a full-
time shrimp fisherman. In calculating the economic profit of his shrimp business, the $5,000 that
Bubba gave up is counted as part of the shrimp business’s
a. total revenue.
b. explicit costs.
c. implicit costs.
d. marginal costs.
ANSWER: c
POINTS: 1
39. The value of a business owner's time is an example of

a. an opportunity cost.
b. a fixed cost.
c. an explicit cost.
d. total revenue.
ANSWER: a
POINTS: 1
40. An example of an opportunity cost that is also an implicit cost is

a. a lease payment.
b. the cost of raw materials.
c. the value of the business owner’s time.
d. All of the above are correct.
ANSWER: c
POINTS: 1
41. Which of the following statements is correct?

a. Opportunity costs equal explicit minus implicit costs.
b. Economists consider opportunity costs to be included in a firm’s total revenues.
c. Economists consider opportunity costs to be included in a firm’s costs of production.
d. All of the above are correct.
ANSWER: c
POINTS: 1
42. Explicit costs

a. require an outlay of money by the firm.
b. include all of the firm's opportunity costs.
c. include the value of the business owner’s time.
d. Both b and c are correct.
ANSWER: a
POINTS: 1
43. An example of an explicit cost of production would be the

a. cost of forgone labor earnings for an entrepreneur.
b. lost opportunity to invest in capital markets when the money is invested in one's business.
c. lease payments for the land on which a firm’s factory stands.
d. Both a and c are correct.
ANSWER: c
POINTS: 1
44. Patrice owns a travel agency. Her accountant most likely includes which of the following costs on
her financial statements?
a. wages Patrice could earn giving tennis lessons
b. dividends Patrice's money was earning in the stock market before Patrice sold her stock and
leased the space for her travel agency
c. the cost of utilities for operating the storefront
ANSWER: c
POINTS: 1
NOTES: r
45. Pete owns a shoe-shine business. His accountant most likely includes which of the following costs
on his financial statements?
(i) shoe polish
(ii) rent on the shoe stand
(iii) wages Pete could earn delivering newspapers
(iv) interest that Pete’s money was earning before he spent his savings to set up the shoe-
shine business
a. (i) only
c. (iii) and (iv) only
d. (i), (ii), (iii), and (iv)
ANSWER: b
POINTS: 1
46. Katya owns a math-tutoring business. Her accountant most likely includes which of the following
costs on her financial statements?
(i) workbooks containing practice problems
(ii) rent for the storefront
(iii) wages Katya could earn as a bookkeeper
(iv) interest that Katya’s money was earning before she spent her savings to set up the
tutoring business
a. (i) only
ANSWER: b
POINTS: 1
NOTES: r
47. Explicit costs

a. do not require an outlay of money by the firm.
b. enter into the accountant's measurement of a firm's profit.
c. enter into the economist's measurement of a firm's profit.
ANSWER: d
POINTS: 1
48. A difference between explicit and implicit costs is that

a. explicit costs must be greater than implicit costs.
b. explicit costs do not require a direct monetary outlay by the firm, whereas implicit costs do.
c. implicit costs do not require a direct monetary outlay by the firm, whereas explicit costs do.
d. implicit costs must be greater than explicit costs.
ANSWER: c
POINTS: 1
49. Which of the following would be an example of an implicit cost?

(i) forgone investment opportunities
(ii) wages of workers
(iii) raw materials costs
a. (i) only
b. (ii) only
d. (i) and (iii) only
ANSWER: a
POINTS: 1
50. Pete owns a shoe-shine business. Which of the following costs would be implicit costs?
(i) shoe polish
(ii) rent on the shoe stand
(iii) wages Pete could earn delivering newspapers
(iv) interest that Pete’s money was earning before he spent his savings to set up the
shoe-shine business
b. (iv) only
ANSWER: c
POINTS: 1
51. Frank owns a dog-grooming business. Which of the following costs would be implicit costs?
(i) dog shampoo
(ii) rent on the storefront
(iii) wages Frank could earn as a substitute elementary-school teacher
(iv) interest that Frank’s money was earning before he spent his savings to set up the dog-
grooming business
b. (iv) only
ANSWER: c
POINTS: 1
NOTES: r
52. Implicit costs

a. do not require an outlay of money by the firm.
b. do not enter into the economist's measurement of a firm's profit.
c. are also known as variable costs.
d. are not part of an economist’s measurement of opportunity cost.
ANSWER: a
POINTS: 1
53. Which of the following is an example of an implicit cost?

(i) the owner of a firm forgoing an opportunity to earn a large salary working for a Wall
Street brokerage firm
(ii) interest paid on the firm's debt
(iii) rent paid by the firm to lease office space
a. (ii) and (iii) only
b. (i) and (iii) only
c. (i) only
d. (iii) only
ANSWER: c
POINTS: 1
54. The amount of money that a wheat farmer could have earned if he had planted barley instead of
wheat is
a. an explicit cost.
b. an accounting cost
c. an implicit cost.
d. forgone accounting profit.
ANSWER: c
POINTS: 1
55. Which of the following is an example of an implicit cost?

a. salaries paid to owners who work for the firm
b. interest on money borrowed to finance equipment purchases
c. cash payments for raw materials
d. foregone rent on office space owned and used by the firm
ANSWER: d
POINTS: 1
56. Foregone investment opportunities are an example of

a. an explicit cost.
b. an implicit cost.
c. revenues.
d. profits.
ANSWER: b
POINTS: 1
57. Jacqui decides to open her own business and earns $50,000 in accounting profit the first year.
When deciding to open her own business, she turned down three separate job offers with annual
salaries of $30,000, $40,000, and $45,000. What is Jacqui's economic profit from running her own
business?
a. $-55,000
b. $-5,000
c. $5,000
d. $20,000
ANSWER: c
POINTS: 1
58. Bev is opening her own court-reporting business. She financed the business by withdrawing
money from her personal savings account. When she closed the account, the bank representative
mentioned that she would have earned $300 in interest next year. If Bev hadn’t opened her own
business, she would have earned a salary of $25,000. In her first year, Bev’s revenues were
$30,000. Which of the following statements is correct?
a. Bev’s total explicit costs are $25,300.
b. Bev’s total implicit costs are $300.
c. Bev’s accounting profits exceed her economic profits by $300.
d. Bev’s economic profit is $4,700.
ANSWER: d
POINTS: 1
59. Walter used to work as a high school teacher for $40,000 per year but quit in order to start his
own painting business. To invest in his painting business, he withdrew $20,000 from his savings,
which paid 3 percent interest, and borrowed $30,000 from his uncle, whom he pays 3 percent
interest per year. Last year Walter paid $25,000 for supplies and had revenue of $60,000. Walter
asked Tyler the accountant and Greg the economist to calculate his painting business’s costs.
a. Tyler says his costs are $25,900, and Greg says his costs are $66,500.
b. Tyler says his costs are $25,000, and Greg says his costs are $65,000.
c. Tyler says his costs are $66,500, and Greg says his costs are $66,500.
d. Tyler says his costs are $75,000, and Greg says his costs are $41,500.
ANSWER: a
POINTS: 1
60. Walter used to work as a high school teacher for $40,000 per year but quit in order to start his
own painting business. To invest in his painting business, he withdrew $20,000 from his savings,
which paid 3 percent interest, and borrowed $30,000 from his uncle, whom he pays 3 percent
interest per year. Last year Walter paid $25,000 for supplies and had revenue of $60,000. Walter
asked Tyler the accountant and Greg the economist to calculate his painting business’s profit.
a. Tyler says his profit is $25,900, and Greg says his profit is $66,500.
b. Tyler says his profit is $35,000, and Greg says he lost $5,900.
c. Tyler says his profit is $34,100, and Greg says he lost $6,500.
d. Tyler says his profit is $34,100, and Greg says his profit is $34,100.
ANSWER: c
POINTS: 1
61. Which of the following statements is correct?

a. Assuming that explicit costs are positive, economic profit is greater than accounting profit.
b. Assuming that implicit costs are positive, accounting profit is greater than economic profit.
c. Assuming that explicit costs are positive, accounting profit is equal to economic profit.
d. Assuming that implicit costs are positive, economic profit is positive.
ANSWER: b
POINTS: 1
62. Katherine gives piano lessons for $15 per hour. She also grows flowers, which she arranges and
sells at the local farmer’s market. One day she spends 5 hours planting $50 worth of seeds in her
garden. Once the seeds have grown into flowers, she can sell them for $150 at the farmer’s
market. Katherine’s accounting profits are
a. $100, and her economic profits are $25.
b. $100, and her economic profits are $75.
c. $25, and her economic profits are $100.
d. $75, and her economic profits are $125.
ANSWER: a
POINTS: 1
63. Katherine gives piano lessons for $20 per hour. She also grows flowers, which she arranges and
sells at the local farmer’s market. One day she spends 5 hours planting $50 worth of seeds in her
garden. Once the seeds have grown into flowers, she can sell them for $150 at the farmer’s
market. Katherine’s accounting profits are
a. $100, and her economic profits are $100.
b. $100, and her economic profits are $0.
c. $0, and her economic profits are $100.
d. $0, and her economic profits are $-100.
ANSWER: b
POINTS: 1
64. The difference between accounting profit and economic profit is

a. explicit costs.
b. implicit costs.
c. total revenue.
d. marginal product.
ANSWER: b
POINTS: 1
65. Economic profit is equal to total revenue minus the

a. explicit cost of producing goods and services.
b. opportunity cost of producing goods and services.
c. accounting cost of producing goods and services.
d. implicit cost of producing goods and services.
ANSWER: b
POINTS: 1
66. Economic profit

a. will never exceed accounting profit.
b. is most often equal to accounting profit.
c. is always at least as large as accounting profit.
d. is a less complete measure of profitability than accounting profit.
ANSWER: a
POINTS: 1
67. When calculating a firm's profit, an economist will subtract only

a. explicit costs from total revenue because these are the only costs that can be measured
explicitly.
b. implicit costs from total revenue because these include both the costs that can be directly
measured as well as the costs that can be indirectly measured.
c. the opportunity costs from total revenue because these include both the implicit and explicit
costs of the firm.
d. the marginal cost because the cost of the next unit is the only relevant cost.
ANSWER: c
POINTS: 1
68. Total revenue minus both explicit and implicit costs is called
a. accounting profit.
b. economic profit.
c. average total cost.
d. total cost.
ANSWER: b
POINTS: 1
69. Total revenue minus only explicit costs is called

b. economic profit.
c. average total cost.
d. implicit profit.
ANSWER: a
POINTS: 1
70. Total revenue minus only implicit costs is called

b. economic profit.
c. opportunity cost.
d. None of the above is correct.
ANSWER: d
POINTS: 1
71. Tom quit his $65,000 a year corporate lawyer job to open up his own law practice. In Tom's first
year in business his total revenue equaled $150,000. Tom's explicit cost during the year totaled
$85,000. What is Tom’s economic profit for his first year in business?
a. $0
b. $20,000
c. $65,000
d. $85,000
ANSWER: a
POINTS: 1
72. The difference between accounting profit and economic profit relates to
a. the manner in which revenues are defined.
b. how marginal revenue is calculated.
c. the manner in which costs are defined.
d. the price of the good in the market.
ANSWER: c
POINTS: 1
73. Jane was a partner at a law firm earning $223,000 per year. She left the firm to open her own law
practice. In the first year of business she generated revenues of $347,000 and incurred explicit
costs of $163,000. Jane’s economic profit from her first year in her own practice is
a. -$39,000.
b. $124,000.
c. $163,000.
d. $184,000.
ANSWER: a
POINTS: 1
74. Accounting profit is equal to

a. marginal revenue minus marginal cost.
b. total revenue minus the explicit cost of producing goods and services.
c. total revenue minus the opportunity cost of producing goods and services.
d. average revenue minus the average cost of producing the last unit of a good or service.
ANSWER: b
POINTS: 1
75. Which of the following expressions is correct?

a. accounting profit = total revenue - explicit costs
b. economic profit = total revenue - implicit costs
c. economic profit = total revenue - explicit costs
d. Both a and b are correct.
ANSWER: a
POINTS: 1
76. Which of the following expressions is correct?

a. accounting profit = economic profit + implicit costs
b. accounting profit = total revenue - implicit costs
c. economic profit = accounting profit + explicit costs
d. economic profit = total revenue - implicit costs
ANSWER: a
POINTS: 1
77. Suppose that for a particular business there are no implicit costs. Then
a. accounting profit will be greater than economic profit.
b. accounting profit will be the same as economic profit.
c. accounting profit will be less than economic profit.
d. the relationship between accounting profit and economic profit cannot be determined without
more information.
ANSWER: b
POINTS: 1
Scenario 13-1
Korie wants to start her own business making custom furniture. She can purchase a factory that
costs $400,000. Korie currently has $500,000 in the bank earning 3 percent interest per year.
78. Refer to Scenario 13-1. If Korie purchases the factory with her own money, what is the annual
implicit opportunity cost of purchasing the factory?
a. $0
b. $3,000
c. $12,000
d. $15,000
ANSWER: c
POINTS: 1
NOTES: r
79. Refer to Scenario 13-1. Suppose Korie purchases the factory using $200,000 of her own money
and $200,000 borrowed from a bank at an interest rate of 6 percent. What is Korie’s annual
opportunity cost of purchasing the factory?
a. $3,000
b. $6,000
c. $15,000
d. $18,000
ANSWER: d
POINTS: 1
NOTES: r
Scenario 13-2
Chelsea wants to start her own Christmas ornament business. She can purchase a suitable factory
that costs $100,000. Chelsea currently has $150,000 in the bank earning 3 percent interest per
year.
80. Refer to Scenario 13-2. Suppose Chelsea purchases the factory using her own money. What is
Chelsea’s annual implicit opportunity cost of purchasing the factory?
a. $2,000
b. $3,000
c. $4,500
d. $5,000
ANSWER: b
POINTS: 1
81. Refer to Scenario 13-2. Suppose Chelsea purchases the factory using $50,000 of her own
money and $50,000 borrowed from a bank at an interest rate of 6 percent. What is Chelsea’s
annual opportunity cost of purchasing the factory?
a. $2,000
b. $3,000
c. $4,500
d. $5,000
ANSWER: c
POINTS: 1
Scenario 13-3
Kachina is a senior majoring in graphic design at Awesome University (AU). While she has been
attending college, Kachina started a computer consulting business to help senior citizens learn
how to use their iPads. Kachina charges $25 per hour for her consulting services. She also works
5 hours a week for the Economics Department to maintain that department's Web page. The
Economics Department pays Kachina $20 per hour.
82. Refer to Scenario 13-3. If Kachina can work additional hours at either job, what is the
opportunity cost if she spends one hour reading a novel?
a. $20
b. $25
c. $100
d. $125
ANSWER: b
POINTS: 1
NOTES: r
83. Refer to Scenario 13-3. Which of the following statements is correct?

a. Kachina should increase the number of hours she works for the Economics Department to
make her income comparable to her consulting business income.
b. Kachina cannot be maximizing her well-being if she continues to work for the Economics
Department.
c. If Kachina chooses one hour at the beach with her friends rather than spend one more hour
with a consulting client, the forgone income of $25 is considered a cost of the choice to go to
the beach.
d. Both b) and c) are correct
ANSWER: c
POINTS: 1
NOTES: r
Scenario 13-4
Suppose that Abdul opens a coffee shop. He receives a loan from a bank for $100,000. He
withdraws $50,000 from his personal savings account. The interest rate on the loan is 8%, and the
interest rate on his savings account is 2%.
84. Refer to Scenario 13-4. Abdul’s explicit cost of capital is

a. $8,000.
b. $4,000.
c. $2,000.
d. $1,000.
ANSWER: a
POINTS: 1
85. Refer to Scenario 13-4. Abdul’s implicit cost of capital is

a. $8,000.
b. $4,000.
c. $2,000.
d. $1,000.
ANSWER: d
POINTS: 1
Scenario 13-5
Suppose that Emily opens a restaurant. She receives a loan from a bank for $200,000. She
withdraws $100,000 from her personal savings account. The interest rate on the loan is 6%, and
the interest rate on her savings account is 2%.
86. Refer to Scenario 13-5. Emily’s explicit cost of capital is

a. $2,000.
b. $4,000.
c. $12,000.
d. $14,000.
ANSWER: c
POINTS: 1
87. Refer to Scenario 13-5. Emily’s implicit cost of capital is

a. $2,000.
b. $4,000.
c. $12,000.
d. $14,000.
ANSWER: a
POINTS: 1
88. Refer to Scenario 13-5. Emily’s total opportunity cost of capital is

a. $2,000.
b. $4,000.
c. $12,000.
d. $14,000.
ANSWER: d
POINTS: 1
Scenario 13-6
Ziva is an organic lettuce farmer, but she also spends part of her day as a professional organizing
consultant. As a consultant, Ziva helps people organize their houses. Due to the popularity of her
home-organization services, Farmer Ziva has more clients requesting her services than she has
time to help if she maintains her farming business. Farmer Ziva charges $25 an hour for her
home-organization services. One spring day, Ziva spends 10 hours in her fields planting $130
worth of seeds on her farm. She expects that the seeds she planted will yield $300 worth of
lettuce.
89. Refer to Scenario 13-6. What is the total opportunity cost of the day that Farmer Ziva spent in
the field planting lettuce?
a. $130
b. $250
c. $300
d. $380
ANSWER: d
POINTS: 1
NOTES: r
90. Refer to Scenario 13-6. An economist would calculate Ziva's total cost of farming to equal a.
$130.
b. $250.
c. $300.
d. $380.
ANSWER: d
POINTS: 1
NOTES: r
91. Refer to Scenario 13-6. Ziva's accountant would calculate the total cost of farming to equal
a. $25.
b. $130.
c. $300.
d. $380.
ANSWER: b
POINTS: 1
NOTES: r
92. Refer to Scenario 13-6. Ziva's accounting profit from farming equals
a. $-80.
b. $130.
c. $170.
d. $260.
ANSWER: c
POINTS: 1
NOTES: r
93. Refer to Scenario 13-6. Ziva's economic profit from farming equals
a. $-130.
b. $-80.
c. $130.
d. $170.
ANSWER: b
POINTS: 1
NOTES: r
Scenario 13-7
Julia prepares tax returns and does bookkeeping. Last year her revenues from the tax and
bookkeeping business were $150,000, and her expenses for the business were $15,000. When she
started her tax and bookkeeping business, Julia gave up her supplemental job doing in-home pet
sitting. She used to earn $10,000 per year from pet sitting. Assume that she incurred no costs for
her pet sitting business.
94. Refer to Scenario 13-7. Julia’s explicit costs are

a. 0.
b. $10,000.
c. $15,000.
d. $25,000.
ANSWER: c
POINTS: 1
NOTES: n
95. Refer to Scenario 13-7. Julia’s implicit costs are

a. 0.
b. $10,000.
c. $15,000.
d. $25,000.
ANSWER: b
POINTS: 1
NOTES: n
96. Refer to Scenario 13-7. Julia’s accounting profits are

a. $160,000.
b. $150,000.
c. $135,000.
d. $125,000.
ANSWER: c
POINTS: 1
NOTES: n
97. Refer to Scenario 13-7. Julia’s economic profits are

a. $160,000.
b. $150,000.
c. $135,000.
d. $125,000.
ANSWER: d
POINTS: 1
NOTES: n
Scenario 13-8
Wanda owns a lemonade stand. She produces lemonade using five inputs: water, sugar, lemons,
paper cups, and labor. Her costs per glass are as follows: $0.01 for water, $0.02 for sugar, $0.03
for lemons, $0.02 for cups, and $0.10 for the opportunity cost of her labor. She can sell 300
glasses for $0.50 each.
98. Refer to Scenario 13-8. What are Wanda’s explicit costs per glass?
a. $0.18
b. $0.10
c. $0.08
d. $0.02
ANSWER: c
POINTS: 1
99. Refer to Scenario 13-8. What are Wanda’s implicit costs per glass?
a. $0.18
b. $0.10
c. $0.08
d. $0.02
ANSWER: b
POINTS: 1
100. Refer to Scenario 13-8. What are Wanda’s total economic costs per glass?
a. $0.18
b. $0.10
c. $0.08
d. $0.02
ANSWER: a
POINTS: 1
101. Refer to Scenario 13-8. What are Wanda’s total accounting profits?
a. $150
b. $126
c. $96
d. $24
ANSWER: b
POINTS: 1
102. Refer to Scenario 13-8. What are Wanda’s total economic profits?
a. $150
b. $126
c. $96
d. $54
ANSWER: c
POINTS: 1
Scenario 13-9
Ellie has been working for an engineering firm and earning an annual salary of $80,000. She
decides to open her own engineering business. Her annual expenses will include $15,000 for
office rent, $3,000 for equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000
salary for a secretary/bookkeeper. Ellie will cover her start-up expenses by cashing in a $20,000
certificate of deposit on which she was earning annual interest of $500.
103. Refer to Scenario 13-9. Ellie's annual implicit costs will equal
a. $55,200.
b. $75,200.
c. $80,500.
d. $165,700.
ANSWER: c
POINTS: 1
104. Refer to Scenario 13-9. Ellie's annual accounting costs will equal
a. $55,200.
b. $75,200.
c. $80,500.
d. $165,700.
ANSWER: a
POINTS: 1
105. Refer to Scenario 13-9. Ellie's annual economic costs will equal
a. $55,200.
b. $75,200.
c. $80,500.
d. $135,700.
ANSWER: d
POINTS: 1
106. Refer to Scenario 13-9. According to Ellie’s accountant, which of the following revenue totals
will yield her business $50,000 in profits?
a. $55,200
b. $105,200
c. $132,500
d. $185,700
ANSWER: b
POINTS: 1
107. Refer to Scenario 13-9. According to an economist, which of the following revenue totals will
yield Ellie’s business $50,000 in economic profits? a. $55,200
b. $100,200 c. $132,500 d. $185,700
ANSWER: d
POINTS: 1
Scenario 13-10
Jessica makes photo frames. She spends $5 on the materials for each photo frame. She can
create one photo frame in an hour. She earns $10 per hour at a part-time job at the local coffee
shop. She can sell a photo frame for $30 each.
108. Refer to Scenario 13-10. An accountant would calculate the total cost for one photo frame to
be
a. $5.
b. $10.
c. $15.
d. $25.
ANSWER: a
POINTS: 1
109. Refer to Scenario 13-10. An economist would calculate the total cost for one photo frame to
be
a. $5.
b. $10.
c. $15.
d. $25.
ANSWER: c
POINTS: 1
110. Refer to Scenario 13-10. An accountant would calculate the total profit for one photo frame to
be
a. $10.
b. $15.
c. $20.
d. $25.
ANSWER: d
POINTS: 1
111. Refer to Scenario 13-10. An economist would calculate the total profit for one photo frame to
be
a. $10.
b. $15.
c. $20.
d. $25.
ANSWER: b
POINTS: 1
Scenario 13-11
Walter builds birdhouses. He spends $5 on the materials for each birdhouse. He can build one in
30 minutes. He is semi-retired but earns $8 per hour at the local hardware store. He can sell a
birdhouse for $20 each.
112. Refer to Scenario 13-11. The explicit cost for one birdhouse is
a. $4.
b. $5.
c. $8.
d. $9.
ANSWER: b
POINTS: 1
113. Refer to Scenario 13-11. The implicit cost for one birdhouse is
a. $4.
b. $5.
c. $8.
d. $9.
ANSWER: a
POINTS: 1
114. Refer to Scenario 13-11. An accountant would calculate the total cost for one birdhouse to be
a. $5.
b. $8.
c. $9.
d. $13.
ANSWER: a
POINTS: 1
115. Refer to Scenario 13-11. An economist would calculate the total cost for one birdhouse to be
a. $5.
b. $8.
c. $9.
d. $13.
ANSWER: c
POINTS: 1
116. Refer to Scenario 13-11. An accountant would calculate the total profit for one birdhouse to
be
a. $7.
b. $11.
c. $12.
d. $15.
ANSWER: d
POINTS: 1
TOPICS: DISC: Producer Theory Production and Cost\
117. Refer to Scenario 13-11. An economist would calculate the total profit for one birdhouse to be
a. $7.
b. $11.
c. $12.
d. $15.
ANSWER: b
POINTS: 1
Scenario 13-12
Ariana withdrew $400,000 out of her personal savings account and used it to start her new
Internet cafe. The savings account pays 3 percent interest per year. During the first year of her
business, Ariana sold 2,000 cups of coffee for $2.50 per cup and 4,000 hours of Internet time,
also at $2.50 per hour. During the first year, the business made monetary outlays of $9,000. You
may assume that there is no opportunity cost to Ariana’s time.
118. Refer to Scenario 13-12. Ariana's accounting profit for the year was
a. $-394,000.
b. $-6,000.
c. $6,000.
d. $12,000.
ANSWER: c
POINTS: 1
NOTES: r
119. Refer to Scenario 13-12. Ariana’s economic profit for the year was
a. $-394,000.
b. $-6,000.
c. $3,000.
d. $6,000.
ANSWER: b
POINTS: 1
NOTES: r
Scenario 13-13
Christine is an artist who creates custom cookie jars. Her annual revenue from selling the cookie
jars is $90,000. The annual explicit costs of the materials used to make the cookie jars are
$54,000.
120. Refer to Scenario 13-13. Christine used $5,000 from her personal savings account to buy
pottery tools for her business. The savings account paid 1% annual interest. What is Christine’s
annual opportunity cost of the financial capital that she invested in her business?
a. $5
b. $50
c. $100
d. $200
ANSWER: b
POINTS: 1
NOTES: r

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The Costs of Production

Multiple Choice – Section 00: Introduction

1. Analyzing the behavior of the firm enhances our understanding of

2. A student might describe information about the costs of production as

4. Economists in the field of industrial organization study how

5. Industrial organization is the study of

Multiple Choice – Section 01: What Are Costs?

2. Economists normally assume that the goal of a firm is to

3. Economists normally assume that the goal of a firm is to earn

4. Economists normally assume that the goal of a firm is to

5. An entrepreneur’s motivation to start a business arises from

6. Economists normally assume that the goal of a firm is to

7. Economists assume that the goal of the firm is to maximize total

10. Total revenue equals

11. Total revenue equals

25. Total cost is the

26. Profit is defined as

27. Profit is defined as total revenue

32. A firm's opportunity costs of production are equal to its

39. The value of a business owner's time is an example of

40. An example of an opportunity cost that is also an implicit cost is

41. Which of the following statements is correct?

42. Explicit costs

43. An example of an explicit cost of production would be the

47. Explicit costs

48. A difference between explicit and implicit costs is that

49. Which of the following would be an example of an implicit cost?

52. Implicit costs

53. Which of the following is an example of an implicit cost?

55. Which of the following is an example of an implicit cost?

56. Foregone investment opportunities are an example of

61. Which of the following statements is correct?

64. The difference between accounting profit and economic profit is

65. Economic profit is equal to total revenue minus the

66. Economic profit

67. When calculating a firm's profit, an economist will subtract only

69. Total revenue minus only explicit costs is called

70. Total revenue minus only implicit costs is called

74. Accounting profit is equal to

75. Which of the following expressions is correct?

76. Which of the following expressions is correct?

83. Refer to Scenario 13-3. Which of the following statements is correct?

84. Refer to Scenario 13-4. Abdul’s explicit cost of capital is

85. Refer to Scenario 13-4. Abdul’s implicit cost of capital is

86. Refer to Scenario 13-5. Emily’s explicit cost of capital is

87. Refer to Scenario 13-5. Emily’s implicit cost of capital is

88. Refer to Scenario 13-5. Emily’s total opportunity cost of capital is

94. Refer to Scenario 13-7. Julia’s explicit costs are

95. Refer to Scenario 13-7. Julia’s implicit costs are

96. Refer to Scenario 13-7. Julia’s accounting profits are

97. Refer to Scenario 13-7. Julia’s economic profits are

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