Costs and the supply of goods

Costs and the supply of goods are two essential economic concepts that play a crucial role in determining the prices and availability of products in the market. The relationship between costs and supply is straightforward: as the cost of producing a product increases, the supply of that product tends to decrease, and vice versa.

In general, the cost of production is comprised of various inputs, such as labor, raw materials, and capital. As these inputs increase, the cost of producing a product also increases. This, in turn, affects the quantity of the product a producer is willing and able to supply in the market. If the cost of production is high, the producer is less likely to produce a large quantity of the product, as it would result in lower profits.

On the other hand, if the cost of production is low, the producer is more likely to produce a large quantity of the product, as it would result in higher profits. This relationship between the cost of production and the amount supplied is reflected in the supply curve, which slopes upward. The upward slope of the supply curve reflects the positive relationship between the cost of production and the quantity supplied.

It is important to note that other factors besides the cost of production also influence the supply of goods. For example, technological advancements, government regulations, and market competition can also affect the supply of goods. However, the relationship between costs and supply remains an essential aspect of the market economy and helps to explain the availability and prices of products in the market.

In conclusion, costs and the supply of goods are closely related concepts that play a critical role in determining the prices and availability of products in the market. As the cost of production increases, the supply of goods tends to decrease, and vice versa, which is reflected in the upward slope of the supply curve. This relationship between costs and supply is essential in understanding the functioning of the market economy.

1.Which of the following is most likely to be true of economic and accounting profits?

Economic profits are less than accounting profits

Accounting profit minus economic profit is zero

Accounting profits are less than economic profits

A positive accounting profit guarantees a positive economic profit

2.Which of the following is a characteristic of corporations?

Their stockholders are not the legal owners of the firm

Their owners’ liability is limited to the amount of their investment in a firm

They do not suffer from principal–agent problems

Their ownership cannot be easily transferred

3.The historical costs of past decisions that cannot be reversed are known as:

fixed costs

sunk costs

opportunity costs

marginal costs

4.If a firm produces 36 units of output with 3 workers and 44 units of output with 4 workers:

the marginal and average product of labor are equal

the average product of labor is 8 units with four workers

the average product of labor rises as the firm adds the fourth worker

the marginal product of the fourth worker is 8 units

5.The short run is the time period during which:

market price cannot change

at least one factor of production is fixed, for example firms are unable to alter their plant sizes

a firm cannot change any factors of production, including labor usage

firms can expand their output by increasing all factors of production including the sizes of their plants

6.The incentive problem that occurs when the purchaser of services (such as an employer) lacks full information about the circumstances faced by the seller (such as an employee) and cannot know how well the person performs the services is known as:

the principal agent problem

limited liability constraint

a residual claimant differential

a sole proprietorship dilemma

7.Suppose a company invests $1 million of its own retained earnings in buying new machinery and equipment. The money was being held in a bank account that earned 10 percent interest per year. The implicit, opportunity cost of this equity capital per year is:

$1,000,000

$100,000

$10,000

zero

8.Which of the following is most likely to be an implicit cost to a firm?

The interest foregone on the equity capital invested by owners

The firm’s interest payments to creditors

The rental payments for the firm’s office building

The salary the owner of the firm pays to her employees

9.A proprietorship is a business firm:

owned by two or more individuals who possess ownership rights to the firm’s profits where employees earn a percentage share of the firm’s profits

owned by two or more individuals who possess ownership rights to the firm’s profits and are personally liable for the debts of the firm

owned by shareholders who possess ownership rights to the firm’s profits, but whose liability is limited to the amount of their investment in the firm

owned by an individual who possesses the ownership right to the firm’s profits and is personally liable for the firm’s debts

10.Identify the correct statement about an average product curve and a marginal product curve.

The average product curve slopes downward when the marginal product curve lies above the average product curve

The marginal product curve intersects the average product curve at its maximum

The average product curve intersects the marginal product curve at its maximum

Marginal and average product curves are parallel and do not intersect

11.Which of the following is a difference between contracting and team production?

While contracting leads to an increase in transaction costs, team production requires monitoring and providing incentives to employees to avoid shirking

While contracting involves the employment of workers operating under the supervision of an owner, team production involves no salaried employees

While contracting leads to maximization of profits, team production leads to an increase in the level of specialized knowledge within the team

While contracting leads to a decrease in cost of production, team production leads to an increase in costs

12.Which of the following is not true of residual claimants?

They have a strong incentive to use resources efficiently in production

They personally receive the excess of revenues over costs

They have a strong incentive to produce goods that are valued highly relative to their production costs

They have a strong incentive to shirk on their jobs because their reward is not linked to their personal effort

13.Which of the following would most likely result in an upward shift of a firm’s cost curve?

An improvement in technology

A decrease in taxes

An increase in costly environmental regulation

A decrease in resource prices

14.Which of the following is true of a firm when it decides to produce zero units of output in the short run?

Its total fixed cost exceeds its total cost

It has no variable costs

Its total cost exceeds its total fixed cost

It has no fixed costs

15.Suppose Alpert Technologies produces widgets. If the fixed cost of the firm is $50,000 and it produces 2,500 widgets per month, then the firm’s average fixed cost equals:

$20

$10

$30

$50

16.Which of the following is true regarding production costs?

Average total cost is the difference between the average fixed cost and the average variable cost

Total fixed cost are zero when the firm produces no output in the short run

Marginal cost is the change in total cost resulting from producing one additional unit

Average fixed cost is the same at all levels of output

17.Jane’s florist has an accounting profit of $150,000, and she does not pay herself a salary. She left a job earning $100,000 to start her business and took $400,000 out of her savings account that was earning 10 percent interest to buy the building and equipment. Which of the following is Jane’s economic profit or loss?

Economic profit of $50,000

Economic profit of $10,000

Economic loss of $50,000

Economic loss of $10,000

18.If a firm expands its plant size in the long run and as a result the per unit costs of production fall, the firm is said to be experiencing:

economies of scale

output efficiency

diminishing returns to capacity

diseconomies of scale

19.Which of the following is most likely to be true when the output produced by a firm increases in the short run?

The marginal cost of the firm does not change

The total variable cost of the firm decreases

The average fixed cost of the firm decreases

The total fixed cost of the firm increases

20.Suppose Comproot Industries produces 100 tractors. If total fixed cost is $5,000 and total variable cost is $2,700, the firm’s average variable cost equals:

$200

$54

$27

$100

21.When a resource is used, the highest valued alternative forgone by the resource owner is known as the:

marginal alternative of the resource

opportunity cost of the resource

sunk cost of the resource

external cost of the resource

22.Which of the following is true of a plant whose rate of output is small relative to its most efficient capacity?

Its average total cost of production will be minimized

Its average fixed cost will be high

Its marginal cost of production will be low

It will have zero fixed cost

23.Which of the following is true of a firm’s cost curves?

A firm’s average total cost curve crosses the average variable cost curve at its minimum point

A firm’s average fixed cost curve will remain constant as the firm changes its level of output in the short run

A firm’s marginal cost curve crosses both the average total cost curve and average variable cost curve at their minimum points

A firm’s average total cost will fall if marginal cost is above average total cost

24.Which of the following would cause a firm’s cost curve to shift downward?

An increase in regulations

An increase in taxes

An increase in resource prices

A decrease in resource prices

25.Fiona’s bakery has revenue of $200,000 and accounting (explicit) costs of $75.000. If Fiona had not invested her own money in the bakery, she could have earned $30,000 in interest income from a bank. To start her business, where she works without a salary, she left a manager’s job where she earned an annual salary of $120,000. Given the information, Fiona’s accounting and economic profit/loss equals:

accounting profit of $125,000; economic loss of $25,000

accounting loss of $25,000; economic loss of $25,000

accounting profit of $125,000; economic profit of $25,000

accounting profit of $25,000; economic profit of $25,000

26.Which of the following costs will remain unchanged when the level of output rises or falls in the short run?

The average variable cost of a firm

The average fixed cost of a firm

The total variable cost of a firm

The total fixed cost of a firm

27.Identify the correct statement about a long-run average total cost curve.

A flat portion of the long-run average total cost curve shows constant returns to scale

An upward-sloping portion of the long-run average total cost curve shows economies of scale are present

A downward-sloping portion of the long-run average total cost curve shows diseconomies of scale are present

A U-shaped long-run average total cost curve shows that the firm never experiences economies of scale

28.If a firm produces 200 units of output, has total variable cost of $5,000 and total fixed cost of $3,000, which of the following is not true?

Average variable cost is $25

Total cost is $8,000

Average fixed cost is $15

Average total cost is $8,000

29.Which of the following is the name given to individual(s) who personally receive the excess of revenues over costs in a business?

team producers(s)

absentee owner(s)

residual claimant(s)

principal agent(s)

30.Identify the correct statement about a firm.

As units of fixed input are added to a variable input, total product will first decrease then increase, once economies of scale begin

As units of variable input are added to a fixed input, total product will decrease

As units of variable input are added to a fixed input, total product will increase, but eventually at a decreasing rate because of diminishing returns

As units of variable input are added to a fixed input, total product will increase at an increasing rate

31.The average total cost curve of a firm is U-shaped because:

for low levels of output, average fixed cost will be low and for high levels of output, average fixed cost will be high

for low levels of output, average fixed cost will be high and for high levels of output, marginal cost will be high

for low levels of output, marginal cost will be high and for high levels of output, average fixed cost will be high

for low levels of output, marginal cost will be high and for high levels of output, marginal cost will be low

32.Which of the following reflects economies of scale?

A constant total fixed cost

A falling long-run average total cost curve

A rising average variable cost curve

A falling marginal product curve

33.If a firm earns zero economic profit, it:

indicates that the firm’s revenue is zero

will shut down immediately

means explicit costs are equal to implicit costs

is earning a competitive rate of return

34.Which of the following forms of business organization combines the advantages of limited liability of a corporation but the tax advantages of a sole proprietorship or partnership?

Limited liability company

General partnership

Dual proprietorship

Chapter Z corporation

35.Which of the following is true when marginal cost is less than average total cost?

Average total cost will be increasing

Average total cost will be at its maximum

Average total cost will be decreasing

Average total cost will be at its minimum

36.Identify the correct statement about marginal cost, average total cost, and average fixed cost.

When marginal cost is greater than average total cost, average total cost will increase

Marginal cost will pass through the maximum of average total cost

When average fixed cost falls, marginal cost must be less than average fixed cost

When marginal cost is greater than average total cost, average total cost will decrease

37.Which of the following are the two costs normally omitted from accounting costs but included in economic costs for a business?

The depreciation of equipment and the prices paid for inputs and resources

The opportunity cost of the owner’s labor effort and the interest forgone on any of the personal money the owner has invested in the business (the opportunity cost of equity capital)

The explicit costs and implicit costs

The cost of employee fringe benefits on health care and retirement, and the taxes paid to the local government

38.Which of the following is a major difference between proprietorship and corporation forms of business organization?

Owner liability is limited in corporations but not proprietorships

It is difficult to transfer ownership in a corporation but not in a proprietorship

Proprietorship income is taxed twice while corporate income is taxed once

By numbers, there are vastly more corporations than proprietorships in the United States

39.If a firm produces 100 units of output, has total cost of $5,000 and total fixed cost of $3,000, the firm’s average variable cost is:

$200

$30

$20

$50

40.If the normal rate of return in an economy is 15 percent, and a specific business firm is currently earning a 10 percent return:

the firm is suffering accounting losses

the firm is earning an economic loss

the firm is earning zero economic profit

the firm is earning positive economic profit

41.Which of the following types of business organization accounts for the largest share of business revenue in the U.S. economy?

Limited liability company

Partnership

Corporation

Proprietorship

42.Identify the correct statement about the relationship between average and marginal product.

When marginal product is equal to average product, average product will be increasing

When marginal product is greater than average product, average product will be decreasing

When average product is less than marginal product, average product will be decreasing

When marginal product is less than average product, average product will be decreasing

43.Identify the correct statement about a firm’s marginal cost curve.

It is U-shaped

It is generally a horizontal line

It is equal to the distance between the firms average total cost curve and average variable cost curve

It is a downward sloping

44.Which of the following is a characteristic of a partnership form of business organization?

The owners are fully liable for all business debts incurred by the organization

The ownership rights are divisible and easily transferable

The income of the owners is subject to double taxation

The shareholders appoint a board of directors to run the organization

45.Economic profit is:

the difference between the firm’s total revenues and its total costs, including both the explicit and implicit costs

the difference between the explicit and implicit costs

the firm’s total revenue minus its explicit costs

the same as accounting profit

Costs and the supply of goods

Costs and the supply of goods

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