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Section 1

1) At a firm's current output level of 200 units per week, it has 10 employees at a weekly
wage of $500 each. Raw materials, which are ordered and delivered daily, cost $1,000 per
week. The weekly cost of the firm's capital is $1,250. Which of the following statements
is correct?
Total variable cost is $5,000; total fixed cost is $2,250; total cost is $7,250.
Total variable cost is $6,000; total fixed cost is $1,250; total cost is $7,250.
Total variable cost is $1,250; total fixed cost is $6,000; total cost is $7,250.
Total variable cost is $2,250; total fixed cost is $500; total cost is $2,750.
Total variable cost is $1,500; total fixed cost is $1,250; total cost is $2,750.
Marks : 1
2) Samantha has been working for a law firm and earning an annual salary of $90,000.
She decides to open her own practice. 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. Samantha will cover her start-up expenses by cashing
in a $20,000 certificate of deposit on which she was earning annual interest of $1,000.
Assuming that there are no additional expenses, Samantha's annual explicit costs will
equal
$55,200
$221,400
$91,000
$146,200
$145,200
Marks : 1
3) A firm's total cost of production
always increases as it produces more output
can increase or decrease as it produces more output
increases at a decreasing rate as long as it produces more output
is fixed in the short run, because inputs are fixed in the short run
can be minimized by producing where the firm's demand curve crosses the horizontal
axis
Marks : 1
4) Assume that an industry requires a very specialized technology that involves high

start-up costs for new firms no matter what level of output they produce. In the long run,
at low levels of output, these firms will tend to exhibit
diminishing marginal returns
increasing marginal returns
diseconomies of scale
constant returns to scale
economies of scale
Marks : 1
5) If a firm increases its output level by 50 percent and, as a result, long-run total cost
rises by 40 percent, the firm is experiencing
diseconomies of scale
constant returns to scale
economies of scale
increasing marginal returns
diminishing marginal returns
Marks : 1
6) A corporation has been steadily losing money on one of its product lines. The factory
used to produce that brand cost $20 million to build. The firm now is considering an offer
to buy that factory for $15 million. Which of the following statements about the decision
to sell or not is correct?
The firm should turn down the purchase offer because the factory cost more than $15
million to build.
The $20 million spent on the factory is a sunk cost that should not affect the decision.
The $20 million spent on the factory is an implicit cost that should be included in the
decision.
The firm should sell the factory only if it can reduce its costs elsewhere by $5 million.
The firm's opportunity cost would be $35 million if it decides to sell the factory.
Marks : 1
7) Last month, Sally spent $3,000 in repairing her old car. Now her car requires an
additional $2,000 in repairs. She could get a comparable car for $2,500. She should
repair her car because the money she has already spent repairing the car ($3,000)
exceeds the price of the new car ($2,500)

buy a new car because sunk costs should be ignored in decision making
buy a new car because the price of the new car ($2,500) is less than the total amount
she would spend on her current car ($5,000)
repair her car since the cost of repairing it is lower than the cost of buying another car
repair the car or buy a comparable one because the opportunity costs are the same
Marks : 1
8) Which of the following is true about the relationships among various cost curves?
When MC exceeds ATC, ATC must be rising.
When MC exceeds ATC, ATC could be rising or falling.
When ATC is falling, MC must exceed ATC.
When TC is rising, MC must exceed TC.
TC falls when AFC falls.
Marks : 1
9) Which of the following, necessarily, equals zero when the firm's short-run output level
is zero?
sunk costs
fixed costs
implicit costs
variable costs
opportunity costs
Marks : 1
10) In comparing long-run and short-run costs, which of the following statements is true
at each level of output?
long-run total cost is always less than short-run total costs
long-run total cost cannot exceed short-run total cost
long-run and short-run total costs are equal when fixed costs are large
firms usually make decisions about production levels based on long-run costs rather
than short-run costs
short-run total cost cannot exceed long-run total cost
Marks : 1

11) Myron worked at a factory where he earned $20,000 per year. He quit his job and
opened a bumper sticker business. After one year, his business earned $60,000 in sales
revenue and he incurred $30,000 in direct business expenses. If he received no salary
from the new business, what is his accounting profit?
$10,000
$20,000
$40,000
$30,000
$60,000
Marks : 1

12)
The firm depicted in Figure 7-11 has a larger plant size at point
H than at point F
F than at point H
F than at point G
G than at point H
H than at point G
Marks : 1
13) Profit is the payment for

land and labor


risk taking and innovation
capital and labor
risk taking and capital
all of the factors of production
Marks : 1
14) The demand curve facing a firm
indicates the amount of raw materials and other inputs the firm will purchase, at
various prices
indicates the amount of the good demanded from that firm by a particular consumer,
at various prices
indicates the amount of output that customers will purchase from the firm, at various
prices
shows the minimum price at which the firm can sell any given quantity of output
is horizontal in the long run, but upward sloping in the short run
Marks : 1
15) The demand curve facing the firm has been estimated as follows:
Price
$200
180
160
140
120
100
80

Output
1
2
3
4
5
6
7

Which of the following statements about the firm's total revenue is correct?
If the firm sold 3 units of output, it would have revenues totaling $540.
If the firm sold 7 units of output, it would have revenues totaling $980.
If the firm increased output from 2 units to 3 units, total revenue would decline.
If the firm increased output from 6 units to 7 units, total revenue would decline.
If the firm decreased output from 6 units to 5 units, total revenue would decline.

Marks : 1
16)
Price
> $800
$800
$750
$700
$650
$600
$550
$500
$450
$400
$350

Figure 8- 4
Units of
Output
0
1
2
3
4
5
6
7
8
9
10

Total
Cost
$ 200
$ 500
$ 700
$ 800
$ 850
$ 950
$1,150
$1,450
$1,850
$2,350
$2,950

Figure 8-4 indicates data for the total cost curve and the demand curve facing Jonathan's
Riding Mower Shop. The quantities indicated are potential daily sales. Jonathan's profitmaximizing sales level is
8 or 9 units
5 units
10 units
6 units
7 units
Marks : 1
17)
Figure 8-9
Demand Schedule for Reproductions
Price
Quantity
Demanded
$1,000
500
$2,000
400
$3,000
300
$4,000
200
$5,000
100

Figure 8-9 shows the demand schedule faced by an artist for reproductions of his
paintings. What is the marginal revenue from expanding from selling reproductions to

400?
$3,000
$1
$0
-$1,000
-$3,000
Marks : 1
18) William quits his job where he earns an annual salary of $75,000 and opens a
management consulting business, charging an hourly rate of $120. He works out of his
home, converting a storeroom into an office. (Zoning restrictions prevent William from
renting out the room.) Start-up costs are financed by selling $15,000 worth of bonds he
inherited that were earning annual interest payments of $900. During his first year,
William incurs expenses for supplies and utilities that total $3,500. The total cost of
production in the first year equals
$94,400
$79,400
$4,400
$3,500
$19,400
Marks : 1
19) What is true only at the output level where price equals average total cost?
Marginal cost equals marginal revenue.
Profit is maximized.
Losses are minimized.
Profit is zero.
Cost is minimized.
Marks : 1
20)
Price
> $800
$800

Figure 8- 4
Units of
Output
0
1

Total
Cost
$ 200
$ 500

$750
$700
$650
$600
$550
$500
$450
$400
$350

2
3
4
5
6
7
8
9
10

$ 700
$ 800
$ 850
$ 950
$1,150
$1,450
$1,850
$2,350
$2,950

Figure 8-4 indicates data for the total cost curve and the demand curve facing Jonathan's
Riding Mower Shop. The quantities indicated are potential daily sales. If Jonathan sells
10 riding mowers per day, he will earn an economic profit of
$0
$150
$350
$500
$550
Marks : 1