Chapter 7 Micro-Economics Review

Economics - Canadian Edition, 14e (Ragan)
Chapter 7 Producers in the Short Run
1) A single proprietorship is a form of business organization which

A) has one owner-manager who is personally responsible for the firm's actions and debts.
B) has a single owner but has directors who are responsible for the firm's debts.
C) has limited liability.
D) has unlimited access to money capital.
E) allows easy transferability of ownership by the trading of shares.
Answer: A
Diff: 1
Topic: 7.1. organization, financing, and goals of firms
Skill: Recall
User2: Qualitative
2) Which of the following statements describes an advantage to the owner of a single

proprietorship?
A) The owner's liability is limited to the amount he or she actually invests in the firm.
B) He or she has limited liability.
C) The owner can readily maintain full and complete control over every aspect of the firm's
operation.
D) The firm has a legal existence separate from its owner.
E) Shares of the firm can be traded on any stock exchange.
Answer: C
Diff: 1
Skill: Recall
User2: Qualitative
3) A firm that has two or more owners who share decision-making power as well as the firm's
profits is called
A) a single proprietorship.
B) a partnership.
C) a corporation.
D) a non-profit organization.
E) a joint-stock company.
Answer: B
Diff: 1
Skill: Recall
User2: Qualitative
1
Copyright © 2014 Pearson Canada, Inc.
4) A limited partnership differs from an ordinary partnership by
A) having a limited number of partners.
B) having a limited number of partners, each with limited liability.
C) including some partners whose liability is restricted to the amount that they invested in the
firm.
D) having limited liability of all partners.
E) having unlimited liability for all partners.
Answer: C
Comment: An algorithmic version of this question appears in MyEconLab
Diff: 1
Skill: Recall
User2: Qualitative
5) Which of the following items is part of a firm's financial capital as distinct from its real
capital?
A) a new bulldozer
B) a $500 000 balance in a bank account
C) a network of personal computers
D) a fleet of delivery trucks
E) inventory of goods valued at $1 000 000
Answer: B
Diff: 1
Skill: Applied
User2: Qualitative
6) Which of the following statements is NOT true of a corporation?

A) It can enter into contracts.
B) It is an entity separate from the individuals who own it.
C) It can incur debt that is an obligation of the corporation but not of its individual owners.
D) It has the right to sue and be sued.
E) It is legally obliged to distribute all profits to shareholders.
Answer: E
Diff: 1
Skill: Recall
User2: Qualitative
2
7) A firm can raise financial capital without incurring debt by
A) issuing bonds.
B) making extra dividend payments.
C) issuing new shares.
D) increasing its bank loans.
E) investing in new capital equipment.
Answer: C
Diff: 2
Skill: Recall
Objective: REVISED
User2: Qualitative
8) Which of the following statements about the organization of firms is true?

A) Partnerships are the most common form of business organization in Canada.
B) Owners of a corporation have unlimited liability.
C) Corporations have limited access to money markets.
D) Owners of a corporation are not personally liable for the firm's actions, though its directors
may be.
E) Crown corporations are never interested in increasing profits because they have other goals.
Answer: D
Diff: 1
Skill: Recall
User2: Qualitative
9) Churches, the YMCA, the Salvation Army, and the Nature Conservancy are examples of
A) single proprietorship.
B) partnership.
C) non-profit organizations.
D) limited partnership.
E) corporations.
Answer: C
Diff: 1
Skill: Applied
User2: Qualitative
3
10) An example of "real" capital is
A) shares in a corporation.
B) corporate bonds.
C) a firm's balance in a bank account.
D) a firm's computer systems.
E) a firm's retained earnings.
Answer: D
Diff: 1
Skill: Applied
User2: Qualitative
11) Real capital includes

A) a firm's physical assets.
B) corporate bonds.
C) corporate stock.
D) a firm's balance in its bank account.
E) owner's equity.
Answer: A
Diff: 1
Skill: Recall
User2: Qualitative
12) Undistributed profits of a firm are

A) earnings that are used to pay dividends to shareholders.
B) earnings that are used to cover the costs of production.
C) earnings that are used to cover interest expenses of the firm.
D) profits that are paid out to owners of the firm.
E) profits that are available to be reinvested in the firm's operations.
Answer: E
Diff: 1
Skill: Recall
User2: Qualitative
4
13) When a corporation issues a bond
A) the purchaser of the bond assumes ownership rights in the corporation.
B) it is making a promise to pay interest each year and to repay the principal at a stated time in
the future.
C) it is called equity capital.
D) it is called financing through the stock market.
E) it is making a promise to pay interest each year but not repay the principal.
Answer: B
Diff: 1
Skill: Recall
User2: Qualitative
14) An example of debt financing for any form of business organization is

A) issuing new stock.
B) buying back bonds.
C) borrowing from a bank.
D) using undistributed profits.
E) buying back previously issued stock.
Answer: C
Diff: 1
Skill: Recall
User2: Qualitative
15) It is assumed in standard economic theory that a firm makes decisions in an effort to
A) become as large as possible.
B) have a highly diversified product.
C) be favoured politically.
D) maximize its revenue.
E) maximize its profits.
Answer: E
Diff: 1
Skill: Recall
User2: Qualitative
5
16) "An objective of firms is to maximize profits." This statement
A) has been proven by empirical testing to be always true.
B) is an assumption used by economists to predict the behaviour of firms.
C) is a normative statement and thus cannot be tested.
D) applies only to corporations.
E) is an unrealistic assumption, and therefore of little use to economists.
Answer: B
Diff: 1
Skill: Recall
User2: Qualitative
17) The theory of the firm is based on the following two key assumptions:
A) Firms seek to become as large as possible, and they seek to maximize total revenue.
B) Each firm has a highly diversified product, and this leads to profit maximization.
C) Firms seek to maximize profit, and to distribute the maximum value in dividends.
D) Firms seek to maximize profits, and the firm is a single, consistent decision-making unit.
E) Firms seek to maximize revenues, and to maximize undistributed profits.
Answer: D
Diff: 2
Skill: Recall
User2: Qualitative
18) Which of the following is the best example of an input to production that is an intermediate
product?
A) 40 acres of farmland
B) the skills and training of a web designer
C) computer circuit boards
D) a textile factory
E) a sewing machine
Answer: C
Diff: 1
Skill: Applied
Objective: NEW
User2: Qualitative
6
19) The relationship between factors of production used in the production process and the
resulting output is called a(n)
A) consumption possibilities boundary.
B) economic function.
C) production boundary.
D) cost function.
E) production function.
Answer: E
Diff: 1
Topic: 7.2a. production functions
Skill: Recall
User2: Qualitative
20) Economists use the notation Q = f(L,K) to describe

A) the flow of labour (L) and capital (K) services that are available when output is (Q).
B) the financial relationship between the inputs that a firm uses and the outputs that it produces.
C) the arithmetic relationship between the outputs that a firm uses and the inputs that it produces.
D) the technological relationship between the inputs that a firm uses and the outputs that it
produces.
E) the level of output (Q) required to fully employ labour (L) and capital (K).
Answer: D
Diff: 2
Skill: Recall
User2: Qualitative
21) The equation Q = 0.5KL - (0.4)L + 2L2 is an example of

A) a factor of production equation.
B) an economic input function.
C) a technological change equation.
D) an arithmetic expression of output quantities.
E) a production function.
Answer: E
Diff: 1
Skill: Applied
User2: Qualitative
7
22) Suppose a production function for a firm takes the following algebraic form: Q = 2KL -
(0.2)L2, where Q is the output of sweaters per day. Now suppose the firm is operating with 8
units of capital (K=8) and 10 units of labour (L=10). What is the output of sweaters?
A) 30 sweaters per day
B) 60 sweaters per day
C) 80 sweaters per day
D) 140 sweaters per day
E) 155 sweaters per day
Answer: D
Diff: 2
Skill: Applied
User2: Quantitative
23) Suppose a production function for a firm takes the following algebraic form: Q = (0.5)KL -
40L, where Q is the output of paintbrushes per week. Now suppose the firm is operating with
100 units of capital (K = 100) and 30 000 units of labour (L = 30 000). What is the output of
paintbrushes per week?
A) 30 000
B) 300 000
C) 1 200 000
D) 1 500 000
E) 3 000 000
Answer: B
Diff: 2
Skill: Applied
Objective: NEW
User2: Quantitative
24) Suppose a production function for a firm takes the following algebraic form: Q = (0.25)K ×
(1.5) , where Q is the output of garage doors produced per month. Now suppose the firm is
operating with 10 units of capital (K = 10) and 8 units of labour (L = 8). What is the output of
garage doors per month?
A) 24
B) 240
C) 300
D) 2400
E) 3000
Answer: B
Diff: 2
Skill: Applied
Objective: NEW
User2: Quantitative
8
25) The opportunity cost of any factor of production is
A) its accounting cost.
B) the money actually paid to the factors of production.
C) the benefit forgone by not using it in its worst alternative.
D) the benefit forgone by not using it in its best alternative.
E) its explicit cost.
Answer: D
Diff: 1
Topic: 7.2b. economic vs. accounting profits
Skill: Recall
User2: Qualitative
26) The choices listed below involve costs to the firm. For which is the implicit cost potentially
different than its explicit cost?
A) The use of firm-owned assets.
B) The services of hired workers.
C) The use of rented land.
D) The interest paid on borrowed money.
E) The purchase of raw materials used in production.
Answer: A
Diff: 2
Skill: Recall
User2: Qualitative
27) The opportunity cost to a firm of using an asset is zero if

A) the asset is already owned by the firm.
B) no money was spent to acquire the asset.
C) the asset has no alternative uses.
D) the asset has zero sunk costs associated with it.
E) the asset was given to the firm for free.
Answer: C
Diff: 2
Skill: Applied
User2: Qualitative
9
28) The opportunity cost of money that a firm's owner has invested in the firm is an example of
A) direct production costs.
B) accounting costs.
C) sunk costs.
D) implicit costs.
E) explicit costs.
Answer: D
Diff: 2
Skill: Applied
User2: Qualitative
29) If a firm uses factor inputs that are personally owned by the firm's owner, then economists
refer to the opportunity cost of these inputs as
A) direct production costs.
B) accounting costs.
C) sunk costs.
D) implicit costs.
E) inverted costs.
Answer: D
Diff: 2
Skill: Recall
User2: Qualitative
30) Economic profits are less than accounting profits because the calculation of economic profit
A) includes an amount for depreciation.
B) includes an explicit charge for risk taking.
C) includes the implicit charges for the use of capital owned by the firm and for risk taking.
D) includes the implicit charges for the use of capital owned by the firm and for income taxes.
E) is stipulated in regulations set forth by the Canada Revenue Agency.
Answer: C
Diff: 2
Skill: Recall
User2: Qualitative
10
31) We can predict that resources will move into an industry whenever
A) accounting profits for firms in that industry are greater than zero.
B) accounting profits for firms in that industry are zero.
C) economic profits for firms in that industry are zero.
D) economic profits for firms in that industry are greater than zero.
E) economic losses for firms in that industry are minimized.
Answer: D
Diff: 1
Skill: Recall
User2: Qualitative
32) If Michelle used $1000 from her savings account, which was paying 6% interest annually, to
invest in her brother's new sporting-goods store, the opportunity cost of her investment on an
annual basis would be
A) $60.
B) $1000.
C) $1060.
D) her share of the store's profits.
E) the dividend paid to her by her brother.
Answer: A
Diff: 2
Skill: Applied
User2: Quantitative
33) Consider the production costs for a firm, one of which is the cost of depreciation.
Depreciation costs are
A) payments to outside suppliers.
B) the cost of money borrowed to buy a durable asset.
C) an estimate of the loss of value of the firm's physical capital.
D) a measure of the depreciation of financial assets of the firm.
E) irrelevant to an accounting of the firm's total costs.
Answer: C
Diff: 2
Skill: Applied
Objective: REVISED
User2: Qualitative
11
The table below provides the annual revenues and costs for a family-owned firm producing
catered meals.
Total Revenues ($) 500 000
Total Costs ($)

- wages and salaries 200 000
- risk-free return of 6% on owners' capital of 250 000 15 000
- rent 105 000
- depreciation of capital equipment 25 000
- risk premium of 8% on owners' capital of 250 000 20 000
- intermediate inputs 150 000
- forgone wages of owners in alternative employment 80 000
- interest on bank loan 10 000
TABLE 7-1
34) Refer to Table 7-1. The explicit costs for this family-owned firm are
A) $115 000.
B) $490 000.
C) $500 000.
D) $505 000.
E) $605 000.
Answer: B
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
35) Refer to Table 7-1. The implicit costs for this family-owned firm are
A) $35 000.
B) $80 000.
C) $100 000.
D) $115 000.
E) $490 000.
Answer: D
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
12
36) Refer to Table 7-1. The accounting profits for this family-owned firm are
A) -$15 000.
B) $0.
C) $10 000.
D) $30 000.
E) $500 000.
Answer: C
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
37) Refer to Table 7-1. The economic profits for this family-owned firm are
A) $115 000.
B) $10 000.
C) $0.
D) -$10 000.
E) -$105 000.
Answer: E
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
38) Refer to Table 7-1. To an accountant, this family-owned catering company is earning
________.To an economist, the same firm is earning ________.
A) zero profit; economic losses
B) zero profit; normal profits
C) positive profits; economic losses
D) economic profits; economic profits
E) economic profits; economic losses
Answer: C
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
13
The table below provides the total revenues and costs for a small landscaping company in a
recent year.
Total Revenues ($) 250 000
Total Costs ($)

- wages and salaries 150 000
- risk-free return of 2% on owner's capital of $20 000 400
- interest on bank loan 1500
- cost of supplies 27 000
- depreciation of capital equipment 8000
- additional wages the owner could have earned in next
best alternative 30 000
- risk premium of 4% on owner's capital of $20 000 800
TABLE 7-2
39) Refer to Table 7-2. The explicit costs for this firm are
A) $178 500.
B) $186 500.
C) $186 900.
D) $217 300.
E) $217 700.
Answer: B
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
40) Refer to Table 7-2. The implicit costs for this firm are
A) $31 200.
B) $30 800.
C) $30 400.
D) $400.
E) $800.
Answer: A
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
14
41) Refer to Table 7-2. The accounting profits for this firm are
A) $32 300.
B) $32 700.
C) $63 100.
D) $63 500.
E) $71 500.
Answer: D
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
42) Refer to Table 7-2. The economic profits for this firm are
A) $63 500.
B) $32 700.
C) $33 500.
D) $31 200.
E) $32 300.
Answer: E
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
43) With regard to economic decision making for firms, the short run is
A) a definite number of months.
B) a period over which the quantities of all factors of production and technology are variable.
C) a period over which the quantity of at least one significant factor of production is fixed.
D) a period over which the quantities of all factors of production are variable but technology is
fixed.
E) less than one year.
Answer: C
Diff: 1
Topic: 7.2c. time horizons for firms
Skill: Recall
User2: Qualitative
15
44) With regard to economic decision making for firms, the long run is a period in which
A) all factors of production are variable but technology is fixed.
B) technology is variable.
C) only some of the factors of production are variable.
D) technology may be variable, but some factors of production are fixed.
E) only capital is variable.
Answer: A
Diff: 1
Skill: Recall
User2: Qualitative
45) Which of the following is most likely a long-run decision for a firm?
A) The hours a store should stay open.
B) How many warehouses to build.
C) The number of workers to hire.
D) The amount of inventory to stock.
E) The price at which to sell the product.
Answer: B
Diff: 1
Skill: Applied
User2: Qualitative
46) The period of time over which at least one factor of production is fixed is called the
A) very-short run.
B) short run.
C) long run.
D) very-long run.
E) immediate run.
Answer: B
Diff: 1
Skill: Recall
User2: Qualitative
16
47) The period of time over which the firm can vary any of its inputs for a given production
technology is called the
A) very-short run.
B) short run.
C) long run.
D) very-long run.
E) immediate run.
Answer: C
Diff: 2
Skill: Recall
User2: Qualitative
48) Which of the following factors of production is most likely to be variable in the short run?
A) capital equipment
B) land
C) labour
D) entrepreneurship
E) technology
Answer: C
Diff: 1
Skill: Recall
User2: Qualitative
49) The period of time over which all factors of production and technology are variable is known
as the
A) very-short run.
B) short run.
C) long run.
D) very-long run.
Answer: D
Diff: 1
Skill: Recall
User2: Qualitative
17
50) The period of time over which the firm can vary its technology of production is the
A) very-short run.
B) short run.
C) long run.
D) very-long run.
E) none of the above; technology cannot be varied.
Answer: D
Diff: 1
Skill: Recall
User2: Qualitative
51) What information is provided by average, marginal, and total product curves?
A) They demonstrate that each of these measures of output increase as more inputs are applied.
B) They demonstrate that, in the short run, all inputs are variable.
C) They relate the prices of inputs (factors of production) to the prices of products.
D) They relate the price of output to the quantity supplied.
E) They express relationships between physical inputs and physical outputs.
Answer: E
Diff: 1
Topic: 7.3a. total product, average product, and marginal product
Skill: Recall
Objective: REVISED
User2: Qualitative
52) Consider a firm in the short run. Average product is at its maximum when
A) total product is maximized.
B) marginal product is maximized.
C) the maximum quantity of the variable input is employed.
D) diminishing returns cease to operate.
E) average product equals marginal product and marginal product is falling.
Answer: E
Diff: 2
Skill: Recall
User2: Qualitative
18
53) Consider a firm in the short run. If total product is at its maximum, then
A) average product must equal marginal product.
B) average product must be rising and must lie above marginal product.
C) marginal product must be greater than zero and must be falling.
D) marginal product must be falling and be equal to zero.
E) average product must be falling and be equal to zero.
Answer: D
Diff: 2
Skill: Applied
User2: Qualitative
54) Consider a firm in the short run. If the AP curve is rising, then the MP curve
A) must lie above the average-product curve over this range and must also be rising.
B) must lie above the average-product curve over this range.
C) can be either above or below the average-product curve, although it must be rising over the
entire range.
D) must lie below the average-product curve over this range.
E) must be falling.
Answer: B
Diff: 2
Skill: Applied
User2: Qualitative
55) Consider a firm in the short run. If AP = MP and both are positive, then total product
A) is at a maximum.
B) is decreasing as extra units of the variable factor are employed.
C) is increasing as extra units of the variable factor are employed.
D) may be either increasing or decreasing as extra units of the variable factor are employed.
E) is at its minimum.
Answer: C
Diff: 2
Skill: Applied
User2: Qualitative
19
56) Consider a firm in the short run. When the total-product curve is increasing at an increasing
rate
A) average product is zero.
B) marginal product is positive but declining.
C) the marginal-product curve lies below the average-product curve.
D) marginal product is positive and increasing.
E) average product is falling.
Answer: D
Diff: 2
Skill: Applied
User2: Qualitative
57) Which of the following statements about the relationship between marginal product and
average product is correct?
A) When average product exceeds marginal product, marginal product must be rising.
B) When marginal product is falling, average product is falling.
C) When marginal product exceeds average product, average product must be rising.
D) Average product equals marginal product at marginal product's lowest point.
E) Average product equals marginal product when marginal product is at its maximum.
Answer: C
Diff: 2
Skill: Applied
User2: Qualitative
20
FIGURE 7-1
58) Refer to Figure 7-1. The marginal product of labour curve intersects the average product of
labour curve when
A) the firm is at its capacity.
B) the firm achieves increasing returns.
C) average product is at its maximum.
D) diminishing returns sets in.
E) total product is at its maximum.
Answer: C
Diff: 2
Skill: Applied
User1: Graph
User2: Qualitative
21
59) Refer to Figure 7-1. Total product is increasing at an increasing rate
A) from 0 to 32 units of output.
B) from 0 to 140 units of output.
C) between 140 to 200 units of output.
D) between 200 to 250 units of output.
E) over the whole production range.
Answer: B
Diff: 3
Skill: Applied
User1: Graph
User2: Qualitative
60) Refer to Figure 7-1. Total product is increasing at a decreasing rate

A) from 0 to 20 units of output.
B) from 0 to 32 units of output.
C) between 140 to 200 units of output.
D) between 140 to 250 units of output.
E) over the whole production range.
Answer: D
Diff: 3
Skill: Applied
User1: Graph
User2: Qualitative
61) Refer to Figure 7-1. If the firm hires the 15th unit of labour,
A) the extra output will be zero.
B) average product will rise.
C) marginal product will be unchanged.
D) the firm will reach its capacity.
E) output will increase by 2 units of output.
Answer: A
Diff: 2
Skill: Applied
Objective: REVISED
User1: Graph
User2: Qualitative
22
62) Refer to Figure 7-1. Suppose each unit of labour represents one worker for one month.
What is the maximum number of workers the firm could hire so that the final worker hired still
raises the average product of the other workers?
A) 7
B) 8
C) 9
D) 10
E) 15
Answer: C
Diff: 3
Skill: Applied
User1: Graph
User2: Quantitative
63) In the short run, the firm's product curves show

A) AP is at its minimum when MP = AP.
B) TP is at its maximum when MP = O.
C) TP begins to decrease when AP begins to decrease.
D) when MP > AP, AP is decreasing.
E) when the MP curve cuts the AP curve from below, the AP curve begins to fall.
Answer: B
Diff: 2
Skill: Applied
User2: Qualitative
64) In the short run, the firm's product curves show

A) AP is at its minimum when MP = AP.
B) TP is at its maximum when MP is at its maximum.
C) TP begins to decrease when AP begins to decrease.
D) when MP < AP, AP is increasing.
E) when the MP curve cuts the AP curve from above, the AP curve begins to fall.
Answer: E
Diff: 2
Skill: Applied
User2: Qualitative
23
65) Suppose that when a firm hires one additional unit of labour, total product increases from
100 to 110 units of output per month. Marginal product must therefore be
A) increasing.
B) positive.
C) decreasing.
D) constant.
E) zero.
Answer: B
Diff: 2
Skill: Applied
Objective: REVISED
User2: Qualitative
The following data show the total output for a firm when different amounts of labour are
combined with a fixed amount of capital. Assume that the wage per unit of labour is $10 and the
cost of the capital is $50.
Labour per period Total output per period

0 0
1 10
2 30
3 90
4 132
5 150
TABLE 7-3
66) Refer to Table 7-3. The marginal product of labour is at its maximum when the firm changes
the amount of labour hired from
A) 0 to 1 unit.
B) 1 to 2 units.
C) 2 to 3 units.
D) 3 to 4 units.
E) 4 to 5 units.
Answer: C
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
24
67) Refer to Table 7-3. The average product of labour is highest when the firm hires
A) 1 unit of labour.
B) 2 units of labour.
C) 3 units of labour.
D) 4 units of labour.
E) 5 units of labour.
Answer: D
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
The following data show the total output for a firm when specified amounts of labour are
combined with a fixed amount of capital. When answering the questions, you are to assume that
the wage per unit of labour is $25 and the cost of the capital is $100.
Labour per unit of time Total output

0 0
1 25
2 75
3 175
4 250
5 305
TABLE 7-4
68) Refer to Table 7-4. The marginal product of labour is at its maximum when the firm changes
the amount of labour hired from
A) 0 to 1 unit.
B) 1 to 2 units.
C) 2 to 3 units.
D) 3 to 4 units.
E) 4 to 5 units.
Answer: C
Diff: 2
Skill: Applied
User1: Table
User2: Quantitative
25
69) Refer to Table 7-4. Diminishing marginal productivity of labour is first observed when the
firm changes the amount of labour hired from
A) 0 to 1 unit.
B) 1 to 2 units.
C) 2 to 3 units.
D) 3 to 4 units.
E) 4 to 5 units.
Answer: D
Diff: 2
Skill: Applied
User1: Table
User2: Quantitative
70) Refer to Table 7-4. The average product of labour is highest when the firm hires ________
units of labour.
A) 1
B) 2
C) 3
D) 4
E) 5
Answer: D
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
71) Refer to Table 7-4. The marginal product of labour curve intersects the average product of
labour curve from above when the firm changes the amount of labour per unit of time from
A) 0 to 1 units.
B) 1 to 2 units.
C) 2 to 3 units.
D) 3 to 4 units.
E) 4 to 5 units.
Answer: E
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
26
72) Refer to Table 7-4. Marginal product of labour begins decreasing with the ________ unit of
labour hired. Average product of labour begins decreasing with the ________ unit of labour
hired.
A) 4th; 3rd
B) 3rd; 2nd
C) 2nd; 3rd
D) 3rd; 4th
E) 4th; 5th
Answer: E
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
73) Suppose NHL hockey player Jarome Iginla is averaging three points per game going into the
last game of the season in which he collects four points, thereby changing his average for the
season. To use an analogy in economics, it could be said that average product increases
A) when total product increases.
B) when marginal product exceeds average product.
C) when average product exceeds marginal product.
D) when marginal product increases.
E) whenever marginal product is positive.
Answer: B
Diff: 2
Skill: Applied
User2: Qualitative
74) Consider a basket-producing firm with fixed capital. If the firm can produce 36 baskets per
day with 3 workers and then increases productivity to 44 baskets per day with 4 workers, then
which of the following statements is true?
A) The marginal product of the fourth worker is 11.
B) The firm has passed the point of diminishing average productivity.
C) The marginal product is above the average product.
D) The firm has not yet reached the point of diminishing marginal productivity.
E) With 4 workers, the firm's average product of labour is 13.
Answer: B
Diff: 3
Skill: Applied
Objective: REVISED
User2: Quantitative
27
day with 3 workers and then increases production to 44 baskets per day with 4 workers, then
which of the following statements is true?
A) The marginal product of the fourth worker is 11.
B) With 4 workers, the marginal product is above the average product.
C) The firm has not yet reached the point of diminishing marginal productivity.
D) The firm has passed the point of diminishing marginal productivity.
E) With 4 workers, the firm's average product of labour is 8.
Answer: D
Diff: 3
Skill: Applied
Objective: NEW
User2: Quantitative
which of the following statements is definitely true?
A) The firm has passed the point of diminishing marginal productivity.
B) The marginal productivity of the fourth worker is 9.
C) The firm has passed the point of diminishing average productivity.
D) With 4 workers, the average product is greater than the marginal product.
E) With 4 workers, the marginal product is greater than the average product.
Answer: E
Diff: 2
Skill: Applied
Objective: NEW
User2: Quantitative
which of the following statements is definitely true?
A) Marginal product for this firm is rising.
B) The marginal product of the fourth worker is 9.
C) Average product for this firm is rising.
D) The firm has passed the point of diminishing marginal productivity.
E) With 4 workers, the average product is greater than the marginal product.
Answer: C
Diff: 3
Skill: Applied
Objective: NEW
User2: Quantitative
28
78) Consider a house-construction firm with fixed capital. The firm can build 8 houses per year
with 16 workers and 8.8 houses per year with 17 workers. If it is currently building 8.8 houses
per year, which of the following is true?
A) Average product is at a maximum with 16 workers.
B) Average product is at a maximum with 17 workers.
C) The marginal product is below the average product.
D) The firm has already passed the point of diminishing marginal productivity.
E) The firm has not yet reached the point of diminishing average productivity.
Answer: E
Diff: 3
Skill: Applied
Objective: REVISED
User2: Quantitative
79) If increasing quantities of a variable factor are applied to a given quantity of fixed factors,
then the law of diminishing returns tells us that
A) the marginal product and the average product of the variable factor will eventually decrease.
B) the marginal product will eventually decrease with constant average product.
C) the average product will eventually decrease with constant marginal product.
D) the average product will eventually decrease, but only if total product is held constant.
E) total product will eventually begin to fall.
Answer: A
Diff: 1
Skill: Recall
User2: Qualitative
80) When a firm's total-product curve is increasing at a decreasing rate

A) average product is zero.
B) marginal product is positive but declining.
C) the marginal-product curve lies below the average-product curve.
D) marginal product is negative and decreasing.
E) average product is falling.
Answer: B
Diff: 3
Skill: Recall
User2: Qualitative
29
81) Diminishing marginal product of labour is said to exist when there is
A) an increase in the amount of capital available for each unit of labour.
B) a reduction in the level of labour input that causes output to increase.
C) an increase in the division and specialization of labour.
D) technological advancement.
E) a successively smaller increase in output with each successive unit increase in labour input.
Answer: E
Diff: 2
Topic: 7.3b. law of diminishing returns
Skill: Recall
User2: Qualitative
82) The law of diminishing returns states that if increasing quantities of a variable factor are
applied to a given quantity of fixed factors, then
A) the MP and the AP of the variable factor will eventually decrease.
B) the MP will eventually decrease with constant AP.
C) the AP will eventually decrease with constant MP.
D) the AP will eventually decrease, but only if TP is held constant.
E) TP will eventually begin to fall.
Answer: A
Diff: 2
Skill: Recall
User2: Qualitative
83) The point of diminishing marginal productivity is the point where

A) marginal product has reached its maximum.
B) average product has reached its maximum.
C) the marginal product begins to fall at an increasing rate.
D) the total product begins to fall.
E) the marginal product curve lies below the average product curve.
Answer: A
Diff: 2
Skill: Recall
User2: Qualitative
30
84) Sport-fishermen on the Campbell River in British Columbia are catching fewer fish and are
having to fish many more hours to catch them. However, the total number of fish caught on the
river continues to increase. The river is experiencing
A) diminishing total returns.
B) constant marginal returns.
C) increasing marginal returns.
D) diminishing marginal returns.
E) increasing average returns.
Answer: D
Diff: 2
Skill: Applied
User2: Qualitative
85) In economics, the term "fixed costs" means

A) implicit costs.
B) opportunity costs.
C) costs that are never accounted for.
D) costs incurred in the past that involve no implicit costs.
E) costs that do not vary with the level of output produced.
Answer: E
Diff: 1
Topic: 7.4. short-run costs and cost-curves
Skill: Recall
User2: Qualitative
31
The following data show the total output for a firm when specified amounts of labour are
combined with a fixed amount of capital. When answering the questions, you are to assume that
the wage per unit of labour is $25 and the cost of the capital is $100.
Labour per unit of time Total output

0 0
1 25
2 75
3 175
4 250
5 305
TABLE 7-4
86) Refer to Table 7-4. Average fixed costs for 305 units of output is approximately
A) 33 cents.
B) 41 cents.
C) 45 cents.
D) 74 cents.
E) 82 cents.
Answer: A
Diff: 2
Skill: Applied
User1: Table
User2: Quantitative
87) Refer to Table 7-4. Average variable costs for 175 units of output is approximately
A) 25 cents.
B) 32 cents.
C) 43 cents.
D) 57 cents.
E) $1.00.
Answer: C
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
32
88) Refer to Table 7-4. The average total cost for 250 units of output is approximately
A) 33 cents.
B) 40 cents.
C) 63 cents.
D) 80 cents.
E) $1.00.
Answer: D
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
89) Refer to Table 7-4. The total cost of producing 175 units of output is
A) $75.
B) $100.
C) $150.
D) $175.
E) $350.
Answer: D
Diff: 2
Skill: Applied
User1: Table
User2: Quantitative
90) Refer to Table 7-4. The average total cost of producing 75 units of output is
A) $1.
B) $2.
C) $0.80.
D) $0.67.
E) $1.33.
Answer: B
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
33
91) Refer to Table 7-4. The total variable cost of producing 305 units of output is
A) $100.
B) $125.
C) $225.
D) $305.
E) $325.
Answer: B
Diff: 2
Skill: Applied
User1: Table
User2: Quantitative
92) Refer to Table 7-4. The total fixed cost of producing 305 units of output is
A) $100.
B) $125.
C) $112.50.
D) $225
E) $305.
Answer: A
Diff: 1
Skill: Applied
User1: Table
User2: Quantitative
93) In the short run time horizon for a firm, total fixed costs
A) decrease and then increase as output increases.
B) decrease as output increases.
C) do not vary with output.
D) increase and then decrease as output increases.
E) are equal to total variable costs.
Answer: C
Diff: 1
Skill: Recall
Objective: REVISED
User2: Qualitative
34
94) Jodi recently went into business producing widgets. Which of the following would be a fixed
cost for her firm?
1. labour costs of $1000 per month
2. raw material costs of $5000 per month
3. a one-year lease on a building of $12 000
A) 1 only
B) 2 only
C) 3 only
D) 1 and 2
E) 2 and 3
Answer: C
Diff: 1
Skill: Applied
Objective: REVISED
User2: Qualitative
95) Marginal cost is defined as the

A) change in total cost resulting from an additional unit of output.
B) change in fixed cost resulting from an additional unit of output.
C) difference between average total cost and average variable cost.
D) cost per unit when the firm is operating at capacity.
E) cost of an additional unit of a variable factor of production.
Answer: A
Diff: 1
Skill: Recall
User2: Qualitative
96) A firm's short-run cost curves, as conventionally drawn, show that

A) AFC increases as output increases.
B) ATC = TFC + TVC.
C) AVC decreases as long as MC > AVC.
D) the MC curve intersects the AVC and ATC curves at their maximum points.
E) ATC decreases and then increases as output increases.
Answer: E
Diff: 2
Skill: Applied
User2: Qualitative
35
97) Consider a firm's short-run cost curves. If average total cost is increasing as output rises, then
A) total fixed costs must be increasing.
B) average fixed costs must be increasing.
C) average variable cost must be increasing.
D) marginal cost must be below average total cost.
E) average total cost is no longer equal to the sum of average variable cost and average fixed
cost.
Answer: C
Diff: 2
Skill: Recall
Objective: REVISED
User2: Qualitative
98) Consider a firm's short-run cost curves. Which one of the following types of cost declines
over the whole range of output?
A) average fixed cost
B) marginal cost
C) total fixed cost
D) average variable cost
E) total variable cost
Answer: A
Diff: 1
Skill: Recall
Objective: REVISED
User2: Qualitative
99) The vertical distance between the total cost curve and the total variable cost curve is
A) marginal cost.
B) average fixed cost.
C) average total cost.
D) total fixed cost.
E) average variable cost.
Answer: D
Diff: 1
Skill: Recall
User2: Qualitative
36
100) Suppose a firm is producing 100 units of output, incurring a total cost of $10 000 and total
variable cost of $6000. It can be concluded that average fixed cost is
A) $40.
B) $60.
C) $100.
D) $160.
E) $4000.
Answer: A
Diff: 2
Skill: Applied
User2: Quantitative
101) Suppose a firm is producing 500 units of output, incurring a total cost of $700 000 and total
fixed cost of $100 000. It can be concluded that average variable cost is
A) $200.
B) $600.
C) $1200.
D) $1400.
E) $1600.
Answer: C
Diff: 3
Skill: Applied
User2: Quantitative
102) Suppose a firm is producing 250 units of output. At this level of output, average fixed costs
are $20 per unit and average variable costs are $80 per unit. It can be concluded that total cost is
A) $100.
B) $0.40 per unit.
C) $40 per unit.
D) $2500.
E) $ 25 000.
Answer: E
Diff: 3
Skill: Applied
Objective: NEW
User2: Quantitative
37
103) Suppose a firm is producing 10 000 units of output. At this level of output, average total
cost is $200 and average fixed cost is $20. It can be concluded that total variable cost is
A) $180.
B) $1800.
C) $18 000.
D) $ 180 000.
E) $1 800 000.
Answer: E
Diff: 3
Skill: Applied
Objective: NEW
User2: Quantitative
104) Suppose a firm with the usual U-shaped cost curves is producing a level of output such that
its short-run costs are as follows:
ATC = $0.37 per unit
AVC = $0.32 per unit
AFC = $0.05 per unit
MC = $0.43 per unit
Given these short-run costs, as the firm increases its output, which of the following statements is
true?
A) Marginal product of the variable factor must be decreasing.
B) Marginal product of the variable factor must be increasing.
C) The point of diminishing average product of the variable factor has not yet been reached.
D) Average product of the variable factor must be increasing.
E) Marginal product of the variable factor is at its minimum point.
Answer: A
Diff: 3
Skill: Applied
Objective: NEW
User2: Quantitative
38
105) Suppose a firm with the usual U-shaped cost curves is producing a level of output such that
its short run costs are as follows:
ATC = $0.37 per unit
AVC = $0.32 per unit
AFC = $0.05 per unit
MC = $0.43 per unit
Given these short run costs, which of the following statements is true?
A) The firm is operating with excess capacity.
B) The firm is operating at capacity.
C) The firm is operating above capacity.
D) The firm has no capacity constraints.
E) The firm is producing a level of output where capacity is increasing.
Answer: C
Diff: 2
Skill: Applied
Objective: NEW
User2: Quantitative
106) Consider the short-run costs of a firm. Suppose the firm's total fixed costs are $100 and
average variable costs are constant regardless of output. Which of the following is then true?
A) Marginal cost will equal average total cost.
B) Average total cost will decrease when output is increased.
C) Marginal cost will be less than average variable cost.
D) Average total costs will be constant.
E) Marginal cost will be rising as output rises.
Answer: B
Diff: 3
Skill: Applied
Objective: REVISED
User2: Qualitative
39
107) Suppose that a firm's capital is fixed and one more unit of labour is hired, thereby
increasing the firm's total output. Which of the following statements can be correct?
1. Marginal cost would remain constant.
2. Marginal cost would increase.
3. Marginal cost would decrease.
A) 1 only
B) 2 only
C) 3 only
D) Any of 1, 2, and 3 is possible.
E) None are possible.
Answer: D
Diff: 3
Skill: Applied
User2: Qualitative
108) A firm's capacity is defined as the level of output where

A) the upper limit on what can be produced is reached.
B) average total cost is at its maximum.
C) marginal cost equals average variable cost.
D) average fixed costs are at a minimum.
E) short-run average total cost is at its minimum.
Answer: E
Diff: 1
Skill: Recall
User2: Qualitative
109) When a plant is operating at the level of output where its short-run average total cost is at
its minimum,
A) average fixed cost is at a minimum.
B) marginal cost is at a minimum.
C) average variable cost is at a minimum.
D) the plant is operating at its capacity.
E) more of the variable factor of production should be employed.
Answer: D
Diff: 1
Skill: Recall
User2: Qualitative
40
110) Short-run cost curves for a firm are eventually upward-sloping because of the effects of
A) the increasing price of variable inputs.
B) diminishing marginal product.
C) increasing fixed costs.
D) increasing marginal productivity of the variable inputs.
E) decreasing total product.
Answer: B
Diff: 2
Skill: Recall
Objective: REVISED
User2: Qualitative
111) A firm's short-run marginal cost curve is decreasing when

A) average fixed cost is increasing.
B) total fixed cost is decreasing.
C) marginal product is decreasing.
D) marginal product is increasing.
E) capacity is reached.
Answer: D
Diff: 2
Skill: Recall
Objective: REVISED
User2: Qualitative
112) When a firm's marginal cost is rising, we know that

A) average fixed cost must be rising.
B) average variable cost must be rising.
C) average total cost must be rising.
D) marginal product must be zero.
E) marginal product must be falling.
Answer: E
Diff: 3
Skill: Recall
User2: Qualitative
41
113) Consider a firm's short-run cost curves. When capital is a fixed factor, a rise in the cost of
labour
A) shifts the marginal cost curve upwards.
B) shifts the AVC curve down.
C) shifts the total product curve downwards.
D) leaves the MC curve unchanged.
E) leaves the ATC curve unchanged.
Answer: A
Diff: 1
Skill: Applied
Objective: REVISED
User2: Qualitative
114) Suppose Jodi's widget business is using two inputs, labour and capital. If the price of labour
increases, which of the following will happen?
A) Jodi will shut down her business.
B) The firm's average total cost curve will shift upward.
C) The firm's marginal cost curve will remain unchanged.
D) Jodi will hire more labour.
E) The firm's average fixed cost curve will shift upward.
Answer: B
Diff: 2
Skill: Applied
Objective: REVISED
User2: Qualitative
42
The following data show the total output for a firm when different amounts of labour are
combined with a fixed amount of capital. Assume that the wage per unit of labour is $10 and the
cost of the capital is $50.
Labour per period Total output per period

0 0
1 10
2 30
3 90
4 132
5 150
TABLE 7-3
115) Refer to Table 7-3. The average total cost when producing 150 units of output is
approximately
A) 33 cents.
B) 40 cents.
C) 67 cents.
D) 80 cents.
E) $1.50.
Answer: C
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
116) Refer to Table 7-3. The average total cost when producing 90 units of output is
approximately
A) 27 cents.
B) 30 cents.
C) 33 cents.
D) 89 cents.
E) $26.67.
Answer: D
Diff: 3
Skill: Applied
Objective: NEW
User1: Table
User2: Quantitative
43
117) Refer to Table 7-3. The average variable cost when producing 132 units of output is
approximately
A) 24 cents.
B) 30 cents.
C) 45 cents.
D) 68 cents.
E) 89 cents.
Answer: B
Diff: 2
Skill: Applied
Objective: NEW
User1: Table
User2: Quantitative
118) Refer to Table 7-3. If this firm is producing 20 units of output per period its marginal cost
is
A) $1.00.
B) 50 cents.
C) $1.67.
D) 16.7 cents.
E) $10.00.
Answer: B
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
119) Refer to Table 7-3. If this firm is producing 111 units of output per period, its marginal
cost is
A) $1.00.
B) 16.7 cents.
C) 76 cents.
D) 24 cents.
E) 38 cents.
Answer: D
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
44
The diagram below shows some short-run cost curves for a firm.
FIGURE 7-2
120) Refer to Figure 7-2. Which of the following choices correctly identifies the cost curves in
part (i) of the figure?
A) Curve 1 is the total cost curve.
Curve 2 is the total variable cost curve.
Curve 3 is the total fixed cost curve.
B) Curve 1 is the total fixed cost curve.
Curve 3 is the total cost curve.
C) Curve 1 is the total variable cost curve.
Curve 2 is the total cost curve.
Curve 3 is the total fixed cost curve.
45
D) Curve 1 is the total marginal cost curve.
Curve 2 is the total average cost curve.
Curve 3 is the total average fixed cost curve.
E) Curve 1 is the total cost curve.
Curve 3 is the average fixed cost curve.
Answer: A
Diff: 2
Skill: Recall
User1: Graph
User2: Qualitative
121) Refer to Figure 7-2. Which of the following choices correctly identifies the cost curves in
part (ii) of the figure?
A) Curve 4 is the marginal cost curve.
Curve 6 is the average variable cost curve.
Curve 7 is the average total cost curve.
B) Curve 4 is the average total cost curve.
Curve 5 is the marginal cost curve.
C) Curve 4 is the average fixed cost curve.
Curve 6 is the marginal cost curve.
D) Curve 4 is the marginal cost curve.
E) Curve 4 is the marginal cost curve.
Answer: D
Diff: 2
Skill: Recall
User1: Graph
User2: Qualitative
46
The table below provides information on output per month and short-run costs for a firm
producing outdoor wooden lounge chairs.
Q TFC TVC TC
5 200 200 400
10 200 220 420
15 200 240 440
20 200 260 460
25 200 350 550
30 200 810 1010
TABLE 7-5
122) Refer to Table 7-5. Given the information in the table about short-run costs, this firm would
minimize the average variable cost of production when producing
A) 10 chairs.
B) 15 chairs.
C) 20 chairs.
D) 25 chairs.
E) 30 chairs.
Answer: C
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
123) Refer to Table 7-5. Given the information in the table about short-run costs, this firm would
minimize the average total cost of production when producing
A) 10 chairs.
B) 15 chairs.
C) 20 chairs.
D) 25 chairs.
E) 30 chairs.
Answer: D
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
47
124) Refer to Table 7-5. At what level of output is this firm at its capacity?
A) 10 chairs
B) 15 chairs
C) 20 chairs
D) 25 chairs
E) 30 chairs
Answer: D
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
125) Suppose a firm producing digital cameras is operating such that marginal costs are higher
than average costs. If the firm produces one more camera, average costs will
A) rise.
B) fall.
C) reach a point of diminishing returns.
D) remain constant.
E) reach their maximum.
Answer: A
Diff: 2
Skill: Applied
User2: Qualitative
48
The table below shows output, marginal cost, and average variable cost for the production of
pairs of shoes. All costs are in dollars.
Marginal Average
Output Cost Variable Cost
50 60 140
70 45 115
90 35 95
110 30 80
130 35 65
150 60 60
170 105 65
190 180 75
210 230 90
230 290 110
TABLE 7-6
126) Refer to Table 7-6. The firm's marginal product of its variable factor is maximized when it
produces ________ units of output.
A) 50
B) 90
C) 100
D) 110
E) 170
Answer: D
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
127) Refer to Table 7-6. Suppose there are no fixed costs. The firm reaches it's capacity level of
output when its output is equal to ________ units.
A) 50
B) 110
C) 150
D) 190
E) 210
Answer: C
Diff: 2
Skill: Applied
User1: Table
User2: Quantitative
49
128) Refer to Table 7-6. If the firm produces 130 pairs of shoes, and the fixed cost is $550, then
the firm's total cost is
A) $7000.
B) $8000.
C) $9000.
D) $10 000.
E) $12 000.
Answer: C
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
129) Refer to Table 7-6. Suppose this firm is producing 210 pairs of shoes per time period and
that the variable factor of production is labour. Which of the following statements best describes
this firm's production?
A) Additional units of labour employed will increase the average variable cost of producing
shoes.
B) Marginal cost is higher than average variable cost, so average product must be rising.
C) Marginal cost is higher than average variable cost, so marginal product must be rising.
D) Each additional unit of labour employed reduces the average variable cost of the pairs of
shoes.
E) The firm is producing below its capacity.
Answer: A
Diff: 3
Skill: Applied
User1: Table
User2: Quantitative
130) A firm that is maximizing its profits by producing a certain level of output must also be
A) minimizing its cost of producing that output.
B) maximizing its sales.
C) minimizing its variable costs.
D) maximizing its output.
E) maximizing its revenue.
Answer: A
Diff: 2
Skill: Recall
Objective: REVISED
User2: Qualitative
50

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Economics - Canadian Edition, 14e (Ragan)

Chapter 7 Producers in the Short Run

1) A single proprietorship is a form of business organization which

2) Which of the following statements describes an advantage to the owner of a single

6) Which of the following statements is NOT true of a corporation?

8) Which of the following statements about the organization of firms is true?

11) Real capital includes

12) Undistributed profits of a firm are

14) An example of debt financing for any form of business organization is

20) Economists use the notation Q = f(L,K) to describe

21) The equation Q = 0.5KL - (0.4)L + 2L2 is an example of

27) The opportunity cost to a firm of using an asset is zero if

Total Revenues ($) 500 000

Total Costs ($)

Total Revenues ($) 250 000

Total Costs ($)

60) Refer to Figure 7-1. Total product is increasing at a decreasing rate

63) In the short run, the firm's product curves show

64) In the short run, the firm's product curves show

Labour per period Total output per period

Labour per unit of time Total output

80) When a firm's total-product curve is increasing at a decreasing rate

83) The point of diminishing marginal productivity is the point where

85) In economics, the term "fixed costs" means

Labour per unit of time Total output

95) Marginal cost is defined as the

96) A firm's short-run cost curves, as conventionally drawn, show that

108) A firm's capacity is defined as the level of output where

111) A firm's short-run marginal cost curve is decreasing when

112) When a firm's marginal cost is rising, we know that

Labour per period Total output per period

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