Principles of Microeconomics, 8e (Case/Fair)

Chapter 7: The Production Process: The Behavior of Proft-Maximizing

Firms

1. Total revenue minus total cost is equal to
A) the rate of return.
B) marginal revenue.
C) profit.
D) net cost.
Answer: C
2. If economic profit is zero, a firm
A) earns a negative rate of return.
B) will leave the industry.
C) earns a positive but below normal rate of return.
D) earns exactly a normal rate of return.
Answer: D
Refer to the information provided in Figure 7.2 below to answer the following questions.

Figure 7.2
3. Refer to Figure 7.2. This corn producer produces 100 bushels of corn and sells each
bushel at $5. The cost of producing each unit bushel is $2. This corn producer's total
revenue is
A) $20.
B) $200.
C) $300.
D) $500.
Answer: D
4. ou own a !uil"in# t$at $as four possi!le uses: a cafe, a craft store, a
$ar"ware store, an" a !oo%store. T$e value of t$e !uil"in# in eac$ use is &2,'''(
&3,'''( &4,'''( an" &),''', respectivel*. ou "eci"e to open a $ar"ware store.
T$e opportunit* cost of usin# t$is !uil"in# for a $ar"ware store is
A) $2!!! the value if the building is used as a cafe.
B) $"!!! the value if the building is used as a craft store.
C) $#!!!! the sum of the values if the building is used for a cafe a craft store or a
boo$store.
D) $%!!! the value if the building is used for a boo$store.
Answer: D
+C,-A.I/ 1: ou are t$e owner an" onl* emplo*ee of a compan* t$at writes
computer software t$at is use" !* #am!lers to collect sports "ata. 0ast *ear *ou
earne" a total revenue of &1','''. our costs for equipment, rent, an" supplies
were &2','''. To start t$is !usiness *ou investe" an amount of *our own capital
t$at coul" pa* *ou a return of &4',''' a *ear.
). .efer to +cenario 1. Durin# t$e *ear *our economic costs were
A) $&!!!!.
B) $'!!!!.
C) $#!!!!!.
D) $#"!!!!.
Answer: C
2. .efer to +cenario 1. A *earl* normal rate of return for *our computer software
firm woul" !e
A) $2!!!!.
B) $&!!!!.
C) $'!!!!.
D) $#!!!!!.
Answer: 3
4. .efer to +cenario 1. our accountin# profit last *ear was
A) $#!!!!.
B) $"!!!!.
C) $%!!!!.
D) $'!!!!.
Answer: 3
5. .efer to +cenario 1. our economic profit last *ear was
A) ($&!!!!.
B) ($#!!!!.
C) $#!!!!.
D) $"!!!!.
Answer: 3
1. T$ere are 1'' "o# %ennels in Atlanta. An economist stu"*in# t$e pricin#
!e$avior of "o# %ennels tells *ou t$at s$e is limitin# $er anal*sis to a time perio"
t$at "oes not allow for an* new "o# %ennels to enter t$e in"ustr* or for an*
esta!lis$e" "o# %ennels to leave t$e in"ustr*. T$e time perio" t$is economist
referre" to is t$e
A) mar$et period.
B) industry run.
C) long run.
D) short run.
Answer: D
1'. Assume t$e wool in"ustr* is perfectl* competitive. 6$* is it "ifficult for a
wool pro"ucer to ma%e e7cess profits8
A) )he fact that wool producers are *price ta$ers.*
B) )he assumption that wool producers in the industry do not *differentiate* their
products.
C) )he fact that the demand curve facing each wool producer is perfectly elastic.
D) )here is free entry into the wool industry.
Answer: D
11. Assume t$e wool in"ustr* is perfectl* competitive. T$e mar%et "eman" curve
for wool is 9999999999 an" eac$ in"ivi"ual wool pro"ucer:s "eman" curve is
9999999999.
A) downward sloping+ hori,ontal
B) hori,ontal+ downward sloping
C) hori,ontal+ hori,ontal
D) downward sloping+ downward sloping
Answer: A
12. T$e fast;foo" in"ustr* is not consi"ere" perfectl* competitive !ecause:
A) entry and exit are strictly regulated by the government.
B) the firm-s products are not homogeneous.
C) firms spend a large amount of money on advertising.
D) there are a very large number of firms.
Answer: 3
The Production Process
13. T$e optimal met$o" of pro"uction is t$e one t$at
A) maximi,es output regardless of cost.
B) maximi,es inputs.
C) minimi,es cost.
D) minimi,es the normal rate of return.
Answer: C
Use the information provided in Table 7.1 below to answer the questions that follow.
Table 7.1
Inputs Required to Produce a Product Using Alternative Technologies
14. .efer to Ta!le 4.1 a!ove. 6$ic$ tec$nolo#* is t$e most la!or intensive8
A) A
B) B
C) C
D) D
Answer: A
1). .efer to Ta!le 4.1. If t$e $ourl* wa#e rate is &4 an" t$e $ourl* price of
capital is &1', w$ic$ pro"uction tec$nolo#* s$oul" !e selecte"8
A) A
B) B
C) C
D) D
Answer: C
12. T$e version of t$e law of "iminis$in# returns t$at applies to pro"uction
A) implies that as we add more wor$ers our output decreases.
B) applies only in the short run.
C) is true only when all inputs are variable.
D) applies in the short and long run.
Answer: 3
14. +uppose output varies, ceteris pari!us, wit$ la!or input in t$e followin#
manner:
After $ow man* units of la!or "o "iminis$in# returns set in8
A) "
B) &
C) %
D) )hey do not set in
Answer: D
15. 6$en total pro"uct is ma7imize", mar#inal pro"uct
A) and average product are ,ero.
B) is positive but average product is ,ero.
C) is ,ero but average product is positive.
D) and average product are positive.
Answer: C
11. <irms $ave an incentive to su!stitute la!or for capital as t$e
A) price of capital increases.
B) price of capital decreases.
C) price of labor increases.
D) marginal product of labor decreases.
Answer: A
2'. At t$e =ampere" =et +alon t$e mar#inal pro"ucts of t$e first, secon", an"
t$ir" wor%ers are 2', 12, an" 1' "o#s was$e", respectivel*. T$e total pro"uct
>num!er of "o#s was$e"? of t$e t$ree wor%er is
A) #%."".
B) "!.
C) &'.
D) #"..
Answer: C
21. If t$e pro"uct "erive" from t$e last "ollar spent on la!or is #reater t$an t$e
pro"uct "erive" from t$e last "ollar spent on capital, t$en t$e firm
A) is minimi,ing costs.
B) should use more labor and less capital to minimi,e costs.
C) should use less labor and more capital to minimi,e costs.
D) should increase the price paid to labor and decrease the price paid to capital to
minimi,e costs.
Answer: 3
22. A #rap$ s$owin# all t$e com!inations of capital an" la!or t$at can !e use" to
pro"uce a #iven amount of output is a>n?
A) indifference curve.
B) iso/uant.
C) isocost line.
D) production function.
Answer: 3
23. A #rap$ s$owin# all t$e com!inations of capital an" la!or availa!le for a
#iven total cost is t$e
A) isocost line.
B) iso/uant.
C) budget constraint.
D) expenditure set.
Answer: A
24. T$e point of tan#enc* !etween an isocost line an" an isoquant is necessaril*
A) the profit(maximi,ing combination of inputs that should be hired to produce that
output level.
B) the least costly combination of inputs that can be hired to produce the output level.
C) both the profit(maximi,ing and least costly combination of inputs that can be used
to produce the output level.
D) the minimum amount of output that can be attained for that level of expenditure.
Answer: 3
2). T$e total cost curve for a firm can !e "erive" from isoquants an" isocost lines
!*
A) varying the prices of capital and labor and $eeping total expenditure constant.
B) varying production technologies but $eeping input prices and expenditure levels
constant.
C) varying total expenditures while $eeping input prices and production technology
constant.
D) varying the price of either capital or labor while $eeping total expenditures and
production technology constant.
Answer: C