TEST I: MULTIPLE CHOICE. Below are given questions along with their multiple choices’ answers.

Read the statement carefully and shade the letter that represents your best answers on the ANSWER
SHEET. (Erasures are not allowed)
1. Implicit costs are:
A) equal to total fixed costs.
B) comprised entirely of variable costs.
C) "payments" for self-employed resources.
D) always greater in the short run than in the long run.

2. Which would be an implicit cost for a firm? The cost:

A) of worker wages and salaries for the firm.
B) paid for leasing a building for the firm.
C) paid for production supplies for the firm.
D) of wages foregone by the owner of the firm.

3. If a firm's revenues just cover all its opportunity costs, then:

A) normal profit is zero.
B) economic profit is zero.
C) total revenues equal its explicit costs.
D) total revenues equal its implicit costs.

4. Suppose a firm sells its product at a price lower than the opportunity cost of the inputs
used to produce it. Which is true?
A) The firm will earn accounting and economic profits.
B) The firm will face accounting and economic losses.
C) The firm will face an accounting loss, but earn economic profits.
D) The firm may earn accounting profits, but will face economic losses.

5. Suppose that a firm produces 200,000 units a year and sells them all for $10 each. The
explicit costs of production are $1,500,000 and the implicit costs of production are
$300,000. The firm has an accounting profit of:
A) $500,000 and an economic profit of $200,000.
B) $400,000 and an economic profit of $200,000.
C) $300,000 and an economic profit of $400,000.
D) $200,000 and an economic profit of $500,000.

6. The short run is a time period in which:

A) all resources are fixed.
B) the level of output is fixed.
C) the size of the production plant is variable.
D) some resources are fixed and others are variable.

7. The law of diminishing returns states that:

A) as a firm uses more of a variable resource, given the quantity of fixed resources,
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the average product of the firm will increase.
B) as a firm uses more of a variable resource, given the quantity of fixed resources,
marginal product of the firm will eventually decrease.
C) in the short run, the average total costs of the firm will eventually diminish.
D) in the long run, the average total costs of the firm will eventually diminish.

8. The law of diminishing returns only applies in cases where:

A) there is increasing scarcity of factors of production.
B) the price of extra units of a factor is increasing.
C) there is at least one fixed factor of production.
D) capital is a variable input.

9. The marginal product of labor curve shows the change in total product resulting from
a:
A) one-unit increase in the quantity of a particular resource used, letting other
resources vary.
B) one-unit increase in the quantity of a particular resource used, holding constant
other resources.
C) change in the cost of a variable resource.
D) change in the cost of a fixed resource.

10. When the total product curve is falling, the:

A) marginal product of labor is zero.
B) marginal product of labor is negative.
C) average product of labor is increasing.
D) average product of labor must be negative.

11. Economists typically assume that the owners of firms wish to

A) produce efficiently.
B) maximize sales revenues.
C) maximize profits.
D) All of the above.

12. An organization that converts inputs (like Labor, Capital etc.) into output is called a
A) firm.
B) sole proprietorship.
C) corporation.
D) All of the above.

13. Efficient production occurs if a firm

A) cannot produce its current level of output with fewer inputs.
B) given the quantity of inputs, cannot produce more output.
C) maximizes profit.
D) All of the above.

14. Which of the following statements best describes a production function?

A) the maximum profit generated from given levels of inputs
B) the maximum level of output generated from given levels of inputs
C) all levels of output that can be generated from given levels of inputs
D) all levels of inputs that could produce a given level of output

15. In the long run, all factors of production are

A) variable.
B) fixed.
C) materials.
D) rented.

16. Joey cuts grass during the summer. He rents a lawn mower from his dad. Which of the following
statements best illustrates the difference between the short run and the long run for Joey?
A) Joey's friends say they will help him, but when he calls them, they say they have other things to do.
B) When Joey acquires more customers, he responds by working more hours. Next year, he will buy a
lawn mower and split the work with his brother.
C) Some customers pay Joey immediately; others wait till the following week.
D) Joey has had to turn away some customers because he is already too busy.

17. If the average product of labor equals the marginal product of labor, then
A) the average product of labor is at a maximum.
B) the marginal product of labor is at a maximum.
C) Both A and B above.
D) Neither A nor B above.

18. Total product is maximized where

A) average product is maximized.
B) marginal product is maximized.
C) average product is equal to 0.
D) marginal product is equal to 0.

19. Which situation is most likely to exhibit diminishing marginal returns to labor?
A) a factory that obtains a new machine for every new worker hired
B) a factory that hires more workers and never increases the amount of machinery
C) a factory that increases the amount of machinery and holds the number of worker constant
D) None of these situations will result in diminishing marginal returns to labor.

20. When marginal product reaches its maximum, what can be said of total product?
A) total product must be at its maximum
B) total product starts to decline even if marginal product is positive
C) total product is increasing if marginal product is still positive
D) total product levels off

TEST II. TRUE or FALSE. Shade letter A if the statement is correct, shade letter B if it says otherwise.
(Erasures are not allowed)
21. Only corporations benefit from limited liability. A
22. The length of the short run is the same for all firms. B

23. Were it not for the law of diminishing marginal returns, we could grow the world's food supply from a
flowerpot. A

24. A firm operating with diminishing total returns cannot be profit maximizing. A

25. The actual time length of the short run is determined by when diminishing marginal returns start. B

26. The value of the inputs owned and used by a firm is an explicit cost. B

27. The entrepreneur's opportunity cost is an implicit cost. A

28. Economic cost is generally lower than accounting cost. B

29. Accounting costs and explicit costs are the same. A

30. Sunk costs are not relevant to managerial decisions. A

31. In the short run, total cost is equal to zero when output is equal to zero. B

32. In the long run, total cost is equal to zero when output is equal to zero. A

33. Economic cost curves define the minimum economic costs of producing various levels of output. A

34. Total variable cost is equal to short-run total cost minus total fixed cost. A

35. The average fixed cost curve is U-shaped. B

36. The law of diminishing returns is reflected in the downward-sloping portion of the short-run marginal
cost curve. B

37. Average total cost is equal to marginal cost where marginal cost is at a minimum. B

38. If the long-run average cost curve slopes upward over some range of output, then the firm is
experiencing increasing returns to scale over that range of output. B

39. The point of inflection of the short-run total variable cost function corresponds to the level of output
where marginal cost is at a minimum. A

40. If marginal cost is greater than average total cost, then average total cost is rising. A