FINAL REVIEW

CHAPTER 5: ELASTICITY OF DEMAND

1) Price Elasticity of Demand (Độ co giãn của cầu theo giá)

1
2
 Revenue = Price x Quantity

2) Income Elasticity of Demand (Độ co giãn của cầu theo thu nhập)

3
3) Cross-price Elasticity of Demand (Độ co giãn của cầu theo giá chéo)
4
Kết quả Income elasticity of Cross-price elasticity of
5
 demand demand
Độ co giãn của cầu theo Độ co giãn của cầu theo
thu nhập giá chéo

Positive sign
Normal goods Substitute goods
>0
Hàng hóa thông thường Hàng hóa thay thế
Số dương

Negative sign
Inferior goods Complement goods
<0
Hàng hóa thứ cấp Hàng hóa bổ sung
Số âm

6
CHAPTER 6: PRICE CONTROLS
1) PRICE CEILING (GIÁ TRẦN)
• If the government feels that the market price is too high  it will establish a
PRICE CEILING -- A legal maximum price for a good or service.
• A price ceiling keeps a price from rising above a certain level—the “ceiling”
• The price ceiling is meant to protect the buyer from the price that is too high
for buyers to afford.

S
P

surplus
•
D
• A price ceiling above the equilibrium price is not binding – it has no effect on
the market outcome.
• A price ceiling below the equilibrium price is a binding constraint on the price –
causes a shortage

•
Q

• With a shortage, sellers must ration the goods among buyers. Some rationing
mechanisms: (1) long waiting lines; (2) discrimination according to sellers’
biases; (3) Black markets

7
 2) PRICE FLOOR (GIÁ SÀN)
• If the government feels that the market price is too low  it will establish a
PRICE FLOOR -- A legal minimum price for a good or service.
• Price floors prevent a price from falling below a certain level. Price floors are
sometimes called price supports

•
• the price floor is meant to protect the seller from the price that is too low for
sellers to cover costs and keep the business
• A price floor below the equilibrium price is not binding – it has no effect on the
market outcome.
• The floor above the equilibrium price is a binding constraint on the price, and
causes a surplus
A price floor is a legal minimum on the price of a good. An example is the minimum
wage. If the price floor is above the equilibrium price, it is binding and causes a
surplus. The labor surplus caused by the minimum wage is unemployment

8
CHAPTER 13: COSTS OF PRODUCTIONS
 Goal of the firm  Profit Maximization

 Profit = Total revenue – Total costs

Explicit Costs Implicit Costs

(Chi phí sổ sách) (Chi phí ẩn)

require an outlay of money do not require an outlay of money

What is seen  Money leaving the firm to What is unseen  Money that could have come into the
purchasing inputs firm if they have produced something else

Generally recorded in books of account. Unrecognized by the accounting system

Examples: Examples:
 Costs of materials,  Foregone wage: An entrepreneur who owns a
 wages and salaries, business could use her labor to earn income at a
 power charges, job;
 transportation expenses, etc.  Foregone interest from your savings;
This expenditure is actually incurred by the  Forgone income from leasing resources: The
firm. Since they are recorded, they are known entrepreneur may use his own land. Rent may
as accounting cost not be paid for this. If the has rented it out to
some body he would have earned some rent.
This should be considered and some amount of
rent should be included in the cost of production


Accounting Profit (Lợi nhuận kế toán) Economic Profit (Lợi nhuận kinh tế)

Economic Profit = Total revenue – Total costs

Accounting Profit =
Total costs = Total opportunity costs = Explicit costs +
Total revenue – Explicit costs
Implicit cost

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10
 Term Definition Description
Costs that require an outlay of money by the
1 Explicit costs  
firm
Costs that do not require an outlay of money
2 Implicit costs  
by the firm
Opportunity all the things that must be forgone to acquire Opportunity cost = Explicit cost +
3
costs an item Implicit cost
total revenue minus total cost, including both Economic profit = Total revenue -
4 economic profit
explicit and implicit costs (Explicit cost + Implicit cost)
accounting Accounting profit = Total revenue
5 total revenue minus total explicit cost
profit - Explicit cost
marginal the increase in output that arises from an
6 MPL = ΔQ / ΔL
product additional unit of input
Costs that do not vary with the quantity of
7 Fixed costs FC
output produced
Costs that vary with the quantity of output
8 Variable costs VC
produced
The market value of all the inputs that a firm
9 Total cost TC = FC + VC
uses in production
1 Average fixed
Fixed cost divided by the quantity of output AFC = FC / Q
0 cost
1 Average variable
Variable cost divided by the quantity of output AVC = VC / Q
1 cost
1 Average total
Total cost divided by the quantity of output ATC = TC / Q
2 cost
1 The increase in total cost that arises from an
Marginal cost MC = ΔTC / ΔQ
3 extra unit of production
1 The amount a firm receives for the sale of its
Total revenue TR = P x Q
4 output
1
Profit total revenue minus total cost Profit = TR - TC = (P - ATC) x Q
5
diminishing the property whereby the marginal product of
1
marginal an input declines as the quantity of the input  
6
product increases
1 the quantity of output that minimizes average
efficient scale The quantity at minimum ATC
7 total cost

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CHAPTER 5: ELASTICITY OF DEMAND
I. TRUE/FALSE
1. Elasticity measures how responsive quantity is to changes in price. (T)
2. The demand for bread is likely to be more elastic than the demand for solid-gold bread
plates. (F)
3. In general, demand curves for necessities tend to be price elastic. (F)
4. In general, demand curves for luxuries tend to be price elastic (T)
5. Goods with close substitutes tend to have more elastic demands than do goods without
close substitutes. (T)
6. The demand for Rice Krispies is more elastic than the demand for cereal in general.
(T)
7. The demand for gasoline will respond more to a change in price over a period of five
weeks than over a period of five years. (F)
8. The price elasticity of demand is defined as the percentage change in price divided by
the percentage change in quantity demanded. (F)
9. If the price of calculators increases by 15 percent and the quantity demanded per week
falls by 45 percent as a result, then the price elasticity of demand is 3. (T)
10. The demand for soap is more elastic than the demand for Dove soap. (F)

II. MULTIPLE CHOICE

1. Which of the following best describes what price elasticity of demand measures?
A. How responsive sellers are to a change in the price of a good
B. How responsive buyers are to a change in income
C. How responsive buyers are to a change in the price of a good
D. How much buyers change price in response to a change in quantity

12
2. When the price of spicy sauce was $10, people bought 100 jars. When the price
increased to $12, people only bought 40 jars.
What is the price elasticity of demand for spicy sauce? (Using stardard method)
A. 0.33
B. 3
C. 7.5
D. 8.98
E. −8.98

13
3. Which of following describes a good that is likely to have the most elastic demand?
A. A necessity with a few substitutes
B. A broadly defined good, such as “food”
C. Good that make up a small share of the budget
D. A luxury with many substitutes
E. Goods that have to be bought under a short time constraint

4. When consumers face rising gasoline prices, they typically

A. reduce their quantity demanded more in the long run than in the short run.
B. reduce their quantity demanded more in the short run than in the long run.
C. do not reduce their quantity demanded in the short run or the long run.
D. increase their quantity demanded in the short run but reduce their quantity demanded
in the long run.

5. The price elasticity of demand measures how much

A. quantity demanded responds to a change in price.
B. quantity demanded responds to a change in income.
C. price responds to a change in demand.
D. demand responds to a change in supply.

6. For a good that is a necessity,

A. quantity demanded tends to respond substantially to a change in price.
B. demand tends to be inelastic.
C. the law of demand does not apply.
D. All of the above are correct.

7. Goods with many close substitutes tend to have

A. more elastic demands.

14
 B. less elastic demands.
C. price elasticities of demand that are unit elastic.
D. income elasticities of demand that are negative.

8. Which of the following is likely to have the most price inelastic demand?
A. mint-flavored toothpaste
B. toothpaste
C. Colgate mint-flavored toothpaste
D. a generic mint-flavored toothpaste

9. If the price of natural gas rises, when is the price elasticity of demand likely to be
the highest?
A. immediately after the price increase
B. one month after the price increase
C. three months after the price increase
D. one year after the price increase

10. If the price of milk rises, when is the price elasticity of demand likely to be the
lowest?
A. immediately after the price increase
B. one month after the price increase
C. three months after the price increase
D. one year after the price increase

11. The demand for Neapolitan ice cream is likely quite elastic because
A. ice cream must be eaten quickly.
B. this particular flavor of ice cream is viewed as a necessity by many ice-cream lovers.
C. the market is broadly defined.
D. other flavors of ice cream are good substitutes for this particular flavor.

15
12. The demand for Werthers candy is likely
A. elastic because candy is expensive relative to other snacks.
B. elastic because there are many close substitutes for Werthers.
C. elastic because Werthers are regarded as a necessity by many people.
D. inelastic because it is usually eaten quickly, making the relevant time horizon short.

13. Holding all other forces constant, when the price of gasoline rises, the number of
gallons of gasoline demanded would fall substantially over a ten-year period because
A. buyers tend to be much less sensitive to a change in price when given more time to
react.
B. buyers tend to be much more sensitive to a change in price when given more time
to react.
C. buyers will have substantially more real income over a ten-year period.
D. the quantity supplied of gasoline increases very little in response to an increase in the
price of gasoline.

14. For which of the following goods would demand be most elastic?
A. clothing
B. blue jeans
C. Tommy Hilfiger jeans
D. All three would have the same elasticity of demand since they are all related.

15. If the price elasticity of demand for a good is 4.0, then a 10 percent increase in
price results in a
A. 0.4 percent decrease in the quantity demanded.
B. 2.5 percent decrease in the quantity demanded.
C. 4 percent decrease in the quantity demanded.
D. 40 percent decrease in the quantity demanded.
16. If the price elasticity of demand for a good is 0.8, then which of the following
events is consistent with a 4 percent decrease in the quantity of the good demanded?
A. a 0.2 percent increase in the price of the good
16
 B. a 3.2 percent increase in the price of the good
C. a 4.8 percent increase in the price of the good
D. a 5 percent increase in the price of the good
17. For a particular good, a 12 percent increase in price causes a 3 percent decrease
in quantity demanded. Which of the following statements is most likely applicable to
this good?
A. There are many substitutes for this good.
B. The good is a necessity.
C. The market for the good is narrowly defined.
D. The relevant time horizon is long.
III. SHORT ANSWER
Consider the following pairs of goods. For which of the two goods would you expect the
demand to be more price elastic? Why?
1. water or diamonds
2. insulin or nasal decongestant spray
3. food in general or breakfast cereal
4. gasoline over the course of a week or gasoline over the course of a year
5. personal computers or IBM personal computers
ANS:
a. Diamonds are luxuries, and water is a necessity. Therefore, diamonds have the more
elastic demand.
b. Insulin has no close substitutes, but decongestant spray does. Therefore, nasal
decongestant spray has the more elastic demand.
c. Breakfast cereal has more substitutes than does food in general. Therefore, breakfast
cereal has the more elastic demand.
d. The longer the time period, the more elastic demand is. Therefore, gasoline over the
course of a year has the more elastic demand.
e. There are more substitutes for IBM personal computers than there are for personal
computers. Therefore, IBM personal computers have the more elastic demand.

Exercise: Suppose that your demand schedule for pizza is as follows:

1. Use the midpoint method to calculate your price elasticity of demand as the price of pizza increases
from $8 to $10 if

17
 (i) your income is $20,000

(ii) your income is $24,000

2. Calculate your income elasticity of demand as your income increases from $20,000 to $24,000 if

(i) the price is $12

(ii) the price is $16.

Price Quantity Demanded (income = Quantity Demanded (income =

$20,000) $24,000)

$8 40 pizzas 50
10 32 45

12 24 30
14 16 20

16 8 12
3. Pizza is a normal good or inferior good based on the result of income elasticity of demand in question
2?

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CHAPTER 6: PRICE CONTROLS
I. TRUE-FALSE
1. A price ceiling set above the equilibrium price is not binding (T)
2. To be binding, a price ceiling must be set above the equilibrium price. (F)
3. A price ceiling set below the equilibrium price is binding. (T)
4. A price ceiling set below the equilibrium price causes quantity demanded to exceed
quantity supplied (T)
5. A price ceiling set above the equilibrium price causes quantity demanded to exceed
quantity supplied. (F)
6. A binding price ceiling causes quantity demanded to be less than quantity supplied (F)
7. A price ceiling set below the equilibrium price causes a shortage in the market. (T)
8. A price ceiling set above the equilibrium price causes a surplus in the market. (F)
9. A binding price ceiling causes a shortage in the market. (T)
10. When a binding price ceiling is imposed on a market for a good, some people who
want to buy the good cannot do so. (T)
11. Price ceilings are typically imposed to benefit buyers. (T)
12. All buyers benefit from a binding price ceiling. (F)
13. The effects of rent control in the long run include lower rents and lower-quality
housing.(T)
14. A price floor set above the equilibrium price is not binding. (F)
15. To be binding, a price floor must be set above the equilibrium price. (T)
16. A price floor set below the equilibrium price causes quantity supplied to exceed
quantity demanded. (F)
17. A price floor set below the equilibrium price causes a surplus in the market.(F)
18. When a binding price floor is imposed on a market for a good, some people who want
to sell the good cannot do so. (T)
19. If the equilibrium price of an airline ticket is $400 and the government imposes a price
floor of $500 on airline tickets, then fewer airline tickets will be sold than at the
market equilibrium. (T)
20. The goal of the minimum wage is to ensure workers a minimally adequate standard of
living. (T)

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 II. MULTIPLE CHOICE
1. In a competitive market free of government regulation,
a. price adjusts until quantity demanded is greater than quantity supplied.
b. price adjusts until quantity demanded is less than quantity supplied.
c. price adjusts until quantity demanded equals quantity supplied.
d. supply adjusts to meet demand at every price.

2. If a price ceiling is not binding, then

a. the equilibrium price is above the price ceiling.
b. the equilibrium price is below the price ceiling.
c. it has no legal enforcement mechanism.
d. More than one of the above is correct.

3. If a nonbinding price ceiling is imposed on a market, then

a. the quantity sold in the market will decrease.
b. the quantity sold in the market will stay the same.
c. the price in the market will increase.
d. the price in the market will decrease.

4. A price ceiling is binding when it is set

a. above the equilibrium price, causing a shortage.
b. above the equilibrium price, causing a surplus.
c. below the equilibrium price, causing a shortage.
d. below the equilibrium price, causing a surplus.

5. If a price ceiling is a binding constraint on a market, then

a. the equilibrium price must be below the price ceiling.
b. the quantity supplied must exceed the quantity demanded.
c. sellers cannot sell all they want to sell at the price ceiling.
d. buyers cannot buy all they want to buy at the price ceiling.
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 6. If a binding price ceiling is imposed on the computer market, then
a. the quantity of computers demanded will increase.
b. the quantity of computers supplied will decrease.
c. a shortage of computers will develop.
d. All of the above are correct.

7. Suppose the equilibrium price of a physical examination ("physical") by a doctor is

$200, and the government imposes a price ceiling of $150 per physical. As a result of
the price ceiling,
a. the demand curve for physicals shifts to the right.
b. the supply curve for physicals shifts to the left.
c. the quantity demanded of physicals increases and the quantity supplied of
physicals decreases.
d. the number of physicals performed stays the same.
8. When a binding price ceiling is imposed on a market to benefit buyers,
a. no buyers actually do benefit.
b. some buyers benefit, but no buyers are harmed.
c. some buyers benefit and some buyers are harmed.
d. all buyers benefit.

9. The goal of rent control is to

a. facilitate controlled economic experiments in urban areas.
b. help landlords by assuring them a low vacancy rate for their apartments.
c. help the poor by assuring them an adequate supply of apartments.
d. help the poor by making housing more affordable.

10. In the housing market, rent control causes

a. quantity supplied and quantity demanded to fall.
b. quantity supplied to fall and quantity demanded to rise.

21
c. quantity supplied to rise and quantity demanded to fall.
d. quantity supplied and quantity demanded to rise.

11. Under rent control, tenants can expect

a. lower rent and higher quality housing.
b. lower rent and lower quality housing.
c. higher rent and a shortage of rental housing.
d. higher rent and a surplus of rental housing.

12. If a price floor is not binding, then

a. there will be a surplus in the market.
b. there will be a shortage in the market.
c. there will be no effect on the market price or quantity sold.
d. the market will be less efficient than it would be without the price floor.

13. A price floor is binding when it is set

a. above the equilibrium price, causing a shortage.
b. above the equilibrium price, causing a surplus.
c. below the equilibrium price, causing a shortage.
d. below the equilibrium price, causing a surplus.

14. A surplus results when

a. a nonbinding price floor is imposed on a market.
b. a nonbinding price floor is removed from a market.
c. a binding price floor is imposed on a market.
d. a binding price floor is removed from a market.

15. If a price floor is a binding constraint on a market, then

a. the equilibrium price must be above the price floor.

22
b. the quantity demanded must exceed the quantity supplied.
c. sellers cannot sell all they want to sell at the price floor.
d. buyers cannot buy all they want to buy at the price floor.

16. If a binding price floor is imposed on the video game market, then
a. the quantity of video games demanded will decrease.
b. the quantity of video games supplied will increase.
c. a surplus of video games will develop.
d. All of the above are correct.

17. When a binding price floor is imposed on a market to benefit sellers,

a. no sellers actually do benefit.
b. some sellers benefit, but no sellers are harmed.
c. some sellers benefit and some sellers are harmed.
d. all sellers benefit.

18. Minimum-wage laws dictate the

a. average price employers must pay for labor.
b. highest price employers may pay for labor.
c. lowest price employers may pay for labor.
d. the highest and lowest prices employers may pay for labor.

19. A minimum wage that is set above a market's equilibrium wage will result in
a. an excess demand for labor, that is, unemployment.
b. an excess demand for labor, that is, a shortage of workers.
c. an excess supply of labor, that is, unemployment.
d. an excess supply of labor, that is, a shortage of workers.

23
 20. The minimum wage, if it is binding, raises the incomes of
a. no workers.
b. only those workers who cannot find jobs.
c. only those workers who have jobs.
d. all workers.
III. SHORT ANSWER
price
1000

900
S
800

700

600

500

400

300

200
D
100

1000 2000 3000 4000 5000 6000 7000 8000 quantity

a) Using the graph shown, analyze the effect a $300 price ceiling would have on the
market for ten-speed bicycles. Would this be a binding price ceiling?
b) Using the graph shown, analyze the effect a $700 price floor would have on this
market for ten-speed bicycles. Would this be a binding price floor?
c) Why would policymakers choose to impose a price ceiling or price floor?

Question 2:
Refer to the table:
1. Which of the following price ceilings would be binding in this market?

24
 a. $2 b. $3 c. $4 d. $5
2. Which of the following price floors would be binding in this market?
a. $1 b. $2 c. $3 d. $4
3. Suppose the government imposes a price ceiling of $1 on this market. What will be
the size of the shortage in this market?
a. 0 units b. 2 units c. 8 units d. 10 units
4. Suppose the government imposes a price ceiling of $5 on this market. What will be
the size of the shortage in this market?
a. 0 units b. 2 units c. 8 units d. 10 units
5. Suppose the government imposes a price floor of $1 on this market. What will be the
size of the surplus in this market?
a. 0 units b. 2 units c. 8 units d. 10 units
6. Suppose the government imposes a price floor of $5 on this market. What will be the
size of the surplus in this market?
a. 0 units b. 2 units c. 8 units d. 10 units
Price Quantity Quantity
Demanded Supplied
$0 12 0
$1 10 2
$2 8 4
$3 6 6
$4 4 8
$5 2 10
$6 0 12

IV.

25
CHAPTER 13: THE COSTS OF PRODUCTION
PART 1: ECONOMIC PROFIT, ACCOUNTING PROFIT, MARGINAL PRODUCT

V. TRUE-FALSE
1) The difference between economic profit and accounting profit is that economic profit is calculated
based on both implicit and explicit costs whereas accounting profit is calculated based on explicit
costs only. (T)
2) Accounting profit is greater than or equal to economic profit. (T)
3) Economic profit is greater than or equal to accounting profit. (F)
4) Although economists and accountants treat many costs differently, they both treat the cost of
capital the same. (F)
5) Accountants keep track of the money that flows into and out of firms. (T)
6) Economists and accountants both include forgone income as a cost to a small business owner. (F)
7) Implicit costs are costs that do not require an outlay of money by the firm. (T)
8) Accountants often ignore implicit costs. (T)
9) Diminishing marginal product exists when the production function becomes flatter as inputs
increase. (T)
10) Diminishing marginal productivity implies decreasing total product. (F)
11) Diminishing marginal productivity implies decreasing marginal product. (T)
VI. MULTIPLE CHOICE
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.

2) Economists assume that the goal of the firm is to maximize total

a. revenue.
b. profits.
c. costs.
d. satisfaction.

26
 3) 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.

4) Total revenue equals

a. price x quantity.
b. price/quantity.
c. (price x quantity) - total cost.
d. output - input.

5) 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.

6) 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.

7) Profit is defined as
a. net revenue minus depreciation.
b. total revenue minus total cost.

27
c. average revenue minus average total cost.
d. marginal revenue minus marginal cost.

8) If Kelsey sells 300 glasses of lemonade at $0.50 each, her total revenues are
a. $150. b. $299.50. c. $300. d. $600.

9) Kirsten sells 300 glasses of lemonade at $0.50 each. Her total costs are $125. Her profits are
a. $25. b. $124.50. c. $125. d. $150.

10) Those things that must be forgone to acquire a good are called
a. implicit costs.
b. opportunity costs.
c. explicit costs.
d. accounting costs.

11) 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.

12) Susan used to work as a telemarketer, earning $25,000 per year. She gave up that job to start a
catering business. In calculating the economic profit of her catering business, the $25,000
income that she gave up is counted as part of the catering firm's
a. total revenue.
b. opportunity costs.
c. explicit costs.
d. marginal costs.

28
 13) Gavin has decided to start his own snow removal business. To purchase the necessary
equipment, Gavin withdrew $2,000 from his savings account, which was earning 3% interest,
and borrowed an additional $4,000 from the bank at an interest rate of 7%. What is Gavin's
annual opportunity cost of the financial capital that has been invested in the business?
a. $60 b. $280 c. $340d. $660

14) 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.

15) 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.

16) 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.
17) Explicit costs
a. require an outlay of money by the firm.
b. include all of the firm's opportunity costs.
c. include income that is forgone by the firm's owners.
d. Both b and c are correct.

18) John owns a shoe-shine business. His accountant most likely includes which of the following
costs on his financial statements?

29
a. wages John could earn washing windows
b. dividends John's money was earning in the stock market before John sold his stock and
bought a shoe-shine booth
c. the cost of shoe polish
d. Both b and c are correct.

19) 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.

20) Jane 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 Jane's economic profit from
running her own business?
a. $-55,000 b. $-5,000 c. $5,000 d. $20,000

21) 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.

30
 22) Dolores used to work as a high school teacher for $40,000 per year but quit in order to start
her own catering business. To invest in her factory, she withdrew $20,000 from her savings,
which paid 3 percent interest, and borrowed $30,000 from her uncle, whom she pays 3 percent
interest per year. Last year she paid $25,000 for ingredients and had revenue of $60,000. She
asked Louis the accountant and Greg the economist to calculate her profit for her.
a. Louis says her profit is $25,900, and Greg says her profit is $66,500.
b. Louis says her profit is $35,000, and Greg says she lost $5,900.
c. Louis says her profit is $34,100, and Greg says she lost $6,500.
d. Louis says her profit is $34,100, and Greg says her profit is $34,100.

23) A difference between explicit and implicit costs is that

a. explicit costs are 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 are greater than explicit costs.

24) 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. Which of the following statements is correct regarding Katherine’s
profits from selling flowers?
a. Katherine’s accounting profits are $100, and her economic profits are $100.
b. Katherine’s accounting profits are $100, and her economic profits are $0.
c. Katherine’s accounting profits are $0, and her economic profits are $100.
d. Katherine’s accounting profits are $0, and her economic profits are $-100.

25) 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.

31
 26) Total revenue minus both explicit and implicit costs is called
a. accounting profit.
b. economic profit.
c. average total cost.
d. None of the above is correct.

27) Kevin quit his $65,000 a year corporate lawyer job to open up his own law practice. In
Kevin's first year in business his total revenue equaled $150,000. Kevin's explicit cost during
the year totaled $85,000. Using the information from Kevin's first year in business, what is his
economic profit?
a. $0 b. $20,000 c. $65,000 d. $85,000

Scenario 12-3
Tony is a wheat farmer, but he also spends part of his day teaching guitar lessons. Due to the
popularity of his local country western band, Farmer Tony has more students requesting lessons than
he has time for if he is to also maintain his farming business. Farmer Tony charges $25 an hour for
his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on
his farm. He expects that the seeds he planted will yield $300 worth of wheat.
28) Refer to Scenario 12-3. What is the total opportunity cost of the day that Farmer Tony
incurred for his spring day in the field planting wheat?
a. $130 b. $250 c. $300d. $380
29) Refer to Scenario 12-3. Tony's accountant would most likely figure the total cost of his
wheat planting to equal
a. $25. b. $130. c. $300. d. $380.
30) Refer to Scenario 12-3. Tony's accounting profit equals
a. $-80. b. $130. c. $170. d. $260.
31) Refer to Scenario 12-3. Tony's economic profit equals
a. $-130. b. $-80. c. $130. d. $170.

32) A production function describes

a. how a firm maximizes profits.
b. how a firm turns inputs into output.
c. the minimal cost of producing a given level of output.

32
d. the relationship between cost and output.

33) A production function is a relationship between inputs and

a. quantity of output.
b. revenue.
c. costs.
d. profit.
Table 12-1 Alyson’s Pet Sitting Service

Number of Workers Output (number of pet visits)

0 0
1 20
2 45
3 60
4 70

33
 34) Refer to Table 12-1. What is the marginal product of the second worker?
a. 15 b. 20 c. 22.5 d. 25
35) Refer to Table 12-1. What is the marginal product of the third worker?
a. 15 b. 20 c. 35 d. 60
36) Refer to Table 12-1. Alyson’s pet sitting service experiences diminishing marginal
productivity with the addition of the
a. first worker. b. second worker. c. third worker. d. fourth worker.

37) Lois is a self-employed pet sitter. She can make 20 “housecalls” per day. She is considering
hiring her sister Dora to work for her. Dora can visit 18 houses per day. What would be the
total output of Lois’s firm if she hired her sister?
a. 18 b. 19 c. 20 d. 38

38) Lois is a self-employed pet sitter. She can make 20 “housecalls” per day. She is considering
hiring her sister Dora to work for her. Both she and Dora can visit 35 houses per day. What
is Dora’s marginal product?
a. 55 b. 35 c. 22.5 d. 15

39) The marginal product of labor is equal to the

a. incremental cost associated with a one unit increase in labor.
b. incremental profit associated with a one unit increase in labor.
c. increase in labor necessary to generate a one unit increase in output.
d. increase in output obtained from a one unit increase in labor.

40) Let L represent the number of workers hired by a firm and let Q represent that firm's quantity
of output. Assume two points on the firm's production function are (L = 12, Q = 122) and (L =
13, Q = 132). Then the marginal product of the 13th worker is
a. 8 units of output.
b. 10 units of output.
c. 122 units of output.
d. 132 units of output.

34
 41) On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires 2
workers. He is able to produce 4,400 bushels of wheat when he hires 3 workers. Which of the
following possibilities is consistent with the property of diminishing marginal product?
a. The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers.
b. The farmer is able to produce 5,800 bushels of wheat when he hires 4 workers.
c. The farmer is able to produce 6,000 bushels of wheat when he hires 4 workers.
d. Any of the above could be correct.

42) When the marginal product of an input declines as the quantity of that input increases, the
production function exhibits
a. increasing marginal product.
b. diminishing marginal product.
c. diminishing total product.
d. Both b and c are correct.
PART 2: MP, FC, VC, TC, MC, AFC, AVC, ATC

VII. TRUE-FALSE
12) Diminishing marginal product exists when the production function becomes flatter as inputs
increase. (T)
13) Diminishing marginal productivity implies decreasing total product. (F)
14) Diminishing marginal productivity implies decreasing marginal product. (T)
15) The typical total-cost curve is U-shaped. (F)
16) If a firm produces nothing, it still incurs its fixed costs. (T)
17) If the marginal cost of producing the tenth unit of output is $3, and if the average total cost of
producing the tenth unit of output is $2, then at ten units of output, average total cost is rising. (T)
18) If the marginal cost of producing the tenth unit of output is $2.50, and if the average total cost of
producing the tenth unit of output is $3, then at ten units of output, average total cost is rising. (F)
19) Marginal costs are costs that do not vary with the quantity of output produced. (F)
20) Variable costs usually change as the firm alters the quantity of output produced. (T)
21) Variable costs equal fixed costs when nothing is produced. (F)
22) Average variable cost is equal to total variable cost divided by quantity of output. (T)
23) The average total cost curve reflects the shape of both the average fixed cost and average variable
cost curves. (T)

35
24) The marginal cost curve intersects the average total cost curve at the minimum point of the
average total cost curve. (T)
25) The marginal cost curve intersects the average total cost curve at the minimum point of the
marginal cost curve. (F)
26) Average total cost reveals how much total cost will change as the firm alters its level of
production. (F)
VIII. MULTIPLE CHOICE
43) A production function describes
a. how a firm maximizes profits.
b. how a firm turns inputs into output.
c. the minimal cost of producing a given level of output.
d. the relationship between cost and output.

44) A production function is a relationship between inputs and

a. quantity of output.
b. revenue.
c. costs.
d. profit.
Table 12-1 Alyson’s Pet Sitting Service

Number of Workers Output (number of pet visits)

0 0
1 20
2 45
3 60
4 70

36
 45) Refer to Table 12-1. What is the marginal product of the second worker?
a. 15 b. 20 c. 22.5 d. 25
46) Refer to Table 12-1. What is the marginal product of the third worker?
a. 15 b. 20 c. 35 d. 60
47) Refer to Table 12-1. Alyson’s pet sitting service experiences diminishing marginal
productivity with the addition of the
a. first worker. b. second worker. c. third worker. d. fourth worker.

48) Lois is a self-employed pet sitter. She can make 20 “housecalls” per day. She is considering
hiring her sister Dora to work for her. Dora can visit 18 houses per day. What would be the
total output of Lois’s firm if she hired her sister?
a. 18 b. 19 c. 20 d. 38

49) Lois is a self-employed pet sitter. She can make 20 “housecalls” per day. She is considering
hiring her sister Dora to work for her. Both she and Dora can visit 35 houses per day. What
is Dora’s marginal product?
a. 55 b. 35 c. 22.5 d. 15

50) The marginal product of labor is equal to the

a. incremental cost associated with a one unit increase in labor.
b. incremental profit associated with a one unit increase in labor.
c. increase in labor necessary to generate a one unit increase in output.
d. increase in output obtained from a one unit increase in labor.

51) Let L represent the number of workers hired by a firm and let Q represent that firm's quantity
of output. Assume two points on the firm's production function are (L = 12, Q = 122) and (L =
13, Q = 132). Then the marginal product of the 13th worker is
a. 8 units of output.
b. 10 units of output.
c. 122 units of output.
d. 132 units of output.

37
 52) On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires 2
workers. He is able to produce 4,400 bushels of wheat when he hires 3 workers. Which of the
following possibilities is consistent with the property of diminishing marginal product?
a. The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers.
b. The farmer is able to produce 5,800 bushels of wheat when he hires 4 workers.
c. The farmer is able to produce 6,000 bushels of wheat when he hires 4 workers.
d. Any of the above could be correct.

53) When the marginal product of an input declines as the quantity of that input increases, the
production function exhibits
a. increasing marginal product.
b. diminishing marginal product.
c. diminishing total product.
d. Both b and c are correct.
54) The marginal product of labor can be defined as
a. change in profit/change in labor.
b. change in output/change in labor.
c. change in labor/change in output.
d. change in labor/change in total cost.
55) When adding another unit of labor leads to an increase in output that is smaller than the
increases in output that resulted from adding previous units of labor, the firm is experiencing
a. diminishing labor.
b. diminishing output.
c. diminishing marginal product.
d. negative marginal product.

Table 12-2

Number of Output Fixed Cost Variable Cost Total Cost

Workers

0 0 $50 $0 $50

1 90 $50 $20 $70

2 170 $50 $40 $90

38
3 230 $50 $60 $110

4 240 $50 $80 $130

39
 56) Refer to Table 12-2. The marginal product of the second worker is
a. 90 units. b. 85 units. c. 80 units. d. 20 units.
57) Refer to Table 12-2. The marginal product of the third worker is
a. 230 units. b. 100 units. c. 77 units. d. 60 units.
58) Refer to Table 12-2. The marginal product of the fourth worker is
a. 10 units. b. 60 units. c. 230 units. d. 240 units.
59) Refer to Table 12-2. At which number of workers does diminishing marginal product begin?
a. 1 b. 2 c. 3 d. 4

Table 12-3

Number of Workers Total Output Marginal Product

0 0 --

1 30

2 40

3 50

4 40

5 30

40
 60) Refer to Table 12-3. What is total output when 1 worker is hired?
a. 30 b. 40 c. 120 d. 160
61) Refer to Table 12-3. What is total output when 2 workers are hired?
a. 30 b. 40 c. 70 d. 120
62) Refer to Table 12-3. What is total output when 3 workers are hired?
a. 30 b. 40 c. 70 d. 120
63) Refer to Table 12-3. What is total output when 5 workers are hired?
a. 70 b. 120 c. 160 d. 190

Table 12-4

Gallo Cork Factory

Output

Number Number (corks Marginal

produced Product of
of of Cost of Cost of Total
Labor
per hour) Workers Machines
Workers Machines Cost

 1  2  5

 2  2  10

 3  2  20

 4  2  35

 5  2  55

 6  2  70

 7  2  80

41
 64) Refer to Table 12-4. Each worker at Gallo's cork factory costs $12 per hour. The cost of each
machine is $20 per day regardless of the number of corks produced. If Gallo's produces at a
rate of 70 corks per hour and operates 8 hours per day, what is Gallo’s total labor cost per
day?
a. $72 b. $112 c. $576d. $616
65) Refer to Table 12-4. Each worker at Gallo's cork factory costs $12 per hour. The cost of each
machine is $20 per day regardless of the number of corks produced. What is the total daily
cost of producing at a rate of 55 units per hour if Gallo’s operates 8 hours per day?
a. $480 b. $576 c. $520d. $616
66) Refer to Table 12-4. Each worker at Gallo's cork factory costs $12 per hour. The cost of each
machine is $20 per day regardless of the number of corks produced. If Gallo's produces at a
rate of 35 corks per hour, what is the total labor cost per hour?
a. $40 b. $48 c. $384d. $424
67) Refer to Table 12-4. Assume Gallo's currently employs 5 workers. What is the marginal
product of labor when Gallo's adds a 6th worker?
a. 5 corks per hour b. 15 corks per hour
c. 25 corks per hour d. 70 corks per hour

A total-cost curve shows the relationship between the

a. quantity of an input used and the total cost of production.
b. quantity of output produced and the total cost of production.
c. total cost of production and profit.
d. total cost of production and total revenue.

Total cost can be divided into two types of costs:

a. fixed costs and variable costs.
b. fixed costs and marginal costs.
c. variable costs and marginal costs.
d. average costs and marginal costs.

Some costs do not vary with the quantity of output produced. Those costs are called
a. marginal costs.
42
b. average costs.
c. fixed costs.
d. incurred costs.

For a construction company that builds houses, which of the following costs would be a fixed cost?
a. the $20 per hour wage paid to a construction foreman
b. the $30,000 per year salary paid to the company's bookkeeper
c. the $2 per worker-hour paid to the state government for workers’ compensation insurance
d. All of the above are correct.

Suppose that for a particular firm the only variable input into the production process is labor and that
output equals zero when no workers are hired. In addition, suppose that when the firm hires 2
workers, the total cost of production is $100. When the firm hires 3 workers, the total cost of
production is $120. In addition, assume that the variable cost per unit of labor is the same regardless
of the number of units of labor that are hired. What is the firm's fixed cost?
a. $40 b. $60 c. $80 d. $100

If a firm produces nothing, which of the following costs will be zero?

a. total cost
b. fixed cost
c. opportunity cost
d. variable cost

The cost of producing the typical unit of output is the firm's

a. average total cost.
b. opportunity cost.
c. variable cost.
d. marginal cost.

Average total cost is equal to

a. output/total cost.
b. total cost - total quantity of output.

43
c. average variable cost + total fixed cost.
d. total cost/output.

Average total cost equals

a. change in total costs divided by quantity produced.
b. change in total costs divided by change in quantity produced.
c. (fixed costs + variable costs) divided by quantity produced.
d. (fixed costs + variable costs) divided by change in quantity produced.

Larry's Lunchcart is a small street vendor business. If Larry makes 15 pretzels in his first hour of
business and incurs a total cost of $16.50, his average total cost per pretzel is
a. $1.10. b. $6.50. c. $15.00. d. $16.50.

A firm produces 300 units of output at a total cost of $1,000. If fixed costs are $100,
a. average fixed cost is $10.
b. average variable cost is $3.
c. average total cost is $4.
d. average total cost is $5.

Marginal cost tells us the

a. value of all resources used in a production process.
b. marginal increment to profitability when price is constant.
c. amount by which total cost rises when output is increased by one unit.
d. amount by which output rises when labor is increased by one unit.

A firm has a fixed cost of $500 in its first year of operation. When the firm produces 100 units of
output, its total costs are $3,500. When it produces 101 units of output, its total costs are $3,750.
What is the marginal cost of producing the 101st unit of output?
a. $250 b. $275 c. $340.91 d. $350
Table 12-5

The Flying Elvis Copter Rides

Quantity Total Fixed Variable Marginal Average Average Average

Cost Cost Cost Cost Fixed Variable Total
44
Refer to Table 12-5. What is the value of A?
a. $25 b. $50 c. $100d. $200
Refer to Table 12-5. What is the value of B?
a. $25 b. $50 c. $100d. $200
Refer to Table 12-5. What is the value of C?
a. $25 b. $50 c. $100d. $200
Refer to Table 12-5. What is the value of G?
a. $30 b. $120 c. $220d. $270
Refer to Table 12-5. What is the value of L?
a. $60 b. $135 c. $240d. $270
Refer to Table 12-5. What is the value of O?
a. $40 b. $140 c. $360d. $410
Table 12-7

Measures of Cost for ABC Inc. Widget Factory

Quantity Variable Total Fixed

of Widgets Costs Costs Costs

0 $10

1 $1

2 $3 $13

3 $6 $16

4 $10

5 $25

6 $21 $10

45
 Table 12-9

Teacher's Helper is a small company that has a subcontract to produce instructional materials for disabled
children in public school districts. The owner rents several small rooms in an office building in the suburbs for
$600 a month and has leased computer equipment that costs $480 a month.
Output Fixed Variable Costs Total Cost Average Fixed Cost Average Average Marginal
Costs Variable Total Cost Cost
(InstructionaL Modules Cost
per Month)

0 $1,080

1 $1,080 $ 400 $1,480 $400

2 $965 $450

3 $1,350 $2,430

4 $1,900 $475

5 $2,500 $216

6 $4,280 $700

7 $4,100

8 $5,400 $135

9 $7,300

10 $10,880 $980

46
Table 12-8

Eileen’s Elegant Earrings produces pairs of earrings for its mail order catalogue business. Each pair is shipped
in a separate box. She rents a small room for $150 a week in the downtown business district that serves as
her factory. She can hire workers for $275 a week. There are no implicit costs.

Boxes of

Earrings Marginal Cost Total Cost

Produced per Product
Number of Cost of of of
Week
Workers of Labor
Factory Workers Inputs

0 0

1 330 330 $150 $275 $425

2 630 300 150 550 700

3 780 150 150 $825 $975

4 890 110 150 1100 1250

5 950 60 150 $1,375 1525

6 960 10 150 1650 $1,800

Table 12-10

Jimmy’s Gigaplots Factory

Quantity Average Average Average

Fixed Variable
of Fixed Variable Total Total Marginal
Cost
Cost Cost Cost
gigaplots Cost Cost Cost

 1 25  $13 $38 25

 2 25  $28 33

 3 25 45  $70

 4 25  $64 89

 5 25 85  $110

 6 25  $108 133

 7 25  $133 158

 8 25 160  $185

47