Chapter 7 pt.1 ( + mylab stuff)

Question 1

Organization of Firms

Answer 1

1. Single (sole) proprietorship
2. An ordinary partnership
3. A limited partnership
4. corporation
5. state-owned enterprise (crown corporations)
6. non-profit organizations

Question 2

Financial capital

Answer 2

the money a firm raises for carrying on its business

Question 3

Physical capital

Answer 3

tangible/physical assets
ex. factories, machinery, offices, fleets of vehicles
- basic types used by firms are equity and debt

Question 4

Equity

Answer 4

In individual proprietorships and partnerships, one or more owners
provide much of the required funds($) (equity)

Question 5

Debt:
a) The firm’s creditors do not own the firm.
b) Firms can borrow from financial institutions, other firms,
individuals.
c) Firms can borrow by taking out a loan, issuing bonds or
other debt instruments.
d) Firms are obligated to pay the principal and interest on
the debt.
e) all

Answer 5

e) all

Question 6

T/F
Firms are assumed to be profit-maximizers and each firm is assumed to be a single, consistent,
decision-making unit. (The CEO and the CFO never
fight)

Answer 6

TRUE - but NOT the goal of all firms
ex. This is not the goal of firms such as Langara College,
Vancouver General Hospital, BC Hydro
– A family owned business might have the goal of
employing all the family, not profit maximization

Question 7

Firms use four types of inputs for production:
1. Inputs that are outputs from some other firm are called intermediate products
2. Inputs provided directly by nature (land)
3. Inputs that are the services of labour (labour)
4. Inputs that are the services of physical capital (capital)

Answer 7

n/a

Question 8

production function

Answer 8

• shows the maximum output that can be produced by a combination of inputs
• describes the technological relationship between the inputs that a firm uses and the output that it produces
• NOTATION: Q = f(L, K)
• production is a flow concept

Question 9

To find economic profit, economists ____ the ____ of all inputs used from revenues
a) add, divide
b) multiply, marginal cost
c) subtract, opportunity cost

Answer 9

c) subtract, opportunity cost

Question 10

Implicit costs
(opportunity cost)

Answer 10

Implicit costs include the opportunity cost of the owner’s time and the opportunity cost of the owner’s capital.
- they are not costs you pay out-of-pocket, but represent monies you could have received had you selected another option

Question 11

Economic profit

Answer 11

the difference between the revenues received from te sale of output and the opportunity cost of all the inputs used to make the output
= revenue - (explicit costs + implicit costs)
or accounting profits - implicit costs

Question 12

Explicit costs
(out-of-pocket costs)

Answer 12

-involves a purchase of goods or services by the firm, hiring of workers the rental of equipment interest payments on debt, and purchase of intermediate inputs, supplies, utilities, labour, etc.

Question 13

Total Cost

Answer 13

• refers to total opportunity cost of al lresources used

Question 14

Firms economic profit = difference between total revenue (TR) the firm derives from the sale of output and total opportunity cost (TC) of producing that output

Answer 14

n/a

Question 15

short run

Answer 15

a time period in which the quantity of some inputs (fixed factors), cannot be changed
- a firm can increase output without increasing fixed inputs
- inputs that are not fixed can be varied in the short run are called variable factors

Question 16

long run

Answer 16

length of time over which all of the firm’s factors of production can be varied, but its choice of technology is fixed (means no new technology is developed)
- the very long run is the length of time over which all the firm’s factors of production can be changed, and the firm can discover, develop and use new technology

Question 17

Total product (TP)

Answer 17

the total amount produced during a given period of time

Question 18

Average product (AP)

Answer 18

the total product divided by the number of units of the variable factor used to produce it.
- if we let the number of units of labour be denoted by L, then:
AP = TP/L

Question 19

Marginal product (MP)

Answer 19

the change in total output that results from using one more unit of a variable factor
-the marginal product of labour is given by:
MP = change in TP/ change in L

Question 20

The law of diminishing returns

Answer 20

states: as the quantity of one input is increased, the marginal value gained from each additional unit of input will eventually decrease

Question 21

James is considering starting a new business. He currently makes $75,000 per year in salary and receives an average bonus of $5,000 per year. However, when he starts his business he only intends to pay himself $20,000 a year until the business becomes profitable. What amount of implicit costs should James include when he evaluates the economic profitability of his business?

a) $100,000

b) $20,000

c) $60,000

d) $80,000

Answer 21

c) $60,000
- James is drawing a salary of $20,000 per year but is forgoing making a total of $80,000 per year (i.e., $75,000 + $5,000 = $80,000). The $20,000 salary is an explicit cost to the business but the difference between what James could be earning and the $20,000 is an implicit cost that will reduce the economic profits of the business

Question 22

Paper $20,000
Wages $48,000
Lease payment for copy machines $10,000
Electricity $6,000
Lease payment for store $24,000
Foregone salary $30,000
Foregone interest $3,000
Total: $141,000

which of the list above are the implicit costs?

Answer 22

Forgone interest and forgone salary
- These are the costs associated with giving up one alternative to pursue another. They are also implicit costs since they are not costs you actually pay out-of-pocket, but instead represent monies you could have received had you selected another option.

• All other costs are explicit, or out-of-pocket costs the firm must make.

Question 23

When information goods are distributed online the marginal cost of production is:

a) zero

b) equal to the price

c) between zero and the price

d) greater than the price

Answer 23

a) zero
-Firms that have the ability to allow digital downloads can produce additional copies at no marginal cost. This ability differs significantly from traditional goods and services.

Question 24

In the short run, the cost that is independent of the amount of output produced is called:

a) implicit cost
b) explicit cost
c) variable cost
d) fixed cost

Answer 24

d) fixed cost
- Fixed cost does not change with the level of output. An example of a fixed cost would be the cost of the equipment used to manufacture a product.

Variable costs vary directly with the level of output. As output increases so do variable costs. Examples include the cost of raw materials used to produce a product.

Explicit costs include any out-of-pocket cost that you pay such as supplies, utilities, labour, etc.

Question 25

Which of the following are sometimes called accounting costs? a) Normal costs b) Explicit costs c) Economic costs d) Implicit costs

Answer 25

b) Explicit costs - These are the actual out-of-pocket costs that are tracked and used to determine accounting profitability. For this reason, you often hear them referred to as accounting costs. -Economic costs include both the explicit and implicit costs associated with undertaking a specific option. Implicit costs are opportunity costs associated with foregoing some other option.

Question 26

__________ equals the firm’s revenues minus its explicit costs. a) Economic profit b) Accounting profit c) Environmental costs d) Sunk costs

Answer 26

b) Accounting profit - Explicit costs, or out-of-pocket costs, include wages paid, utilities, and any other purchase made by the firm. - Economic profit equals the firm’s revenues minus all implicit and explicit costs. Economic profit considers all costs, including out-of-pocket costs (explicit costs) and opportunity costs. Implicit costs include items such as the loss of rental income associated with using a facility instead of renting it to another firm. - Sunk costs are those costs that once made cannot be recovered. For this reason, sunk costs should not be considered in economic decision-making.

Question 27

quantity produced = 100 total cost = $58 variable cost = $34 what is the fixed cost? a) $9,200 b) $5,800 c) $3,400 d) $2,400

Answer 27

d) $2,400 - At 100 units of output, the firm is generating $5,800 in total costs, of which $3,400 is variable cost. Therefore, the fixed cost is the difference of $5,800 - $3,400 = $2,400.

Question 28

For information goods, the average total cost curve is: a) positively sloped and gets closer to the horizontal axis as quantity sold increases b) negatively sloped and gets closer to the horizontal axis as quantity sold increases c) positively sloped and gets closer to a positive value as quantity sold increases d) negatively sloped and gets closer to a positive value as quantity sold increases

Answer 28

b) negatively sloped and gets closer to the horizontal axis as quantity sold increases -Since information goods have high fixed costs, but essentially zero variable cost, the fixed cost per unit gets smaller and smaller as the number of units sold increases. If sales are high enough at some point, the average cost curve will almost touch the horizontal axis.

Question 29

informational goods

Answer 29

- Information goods are **products** that can be **distributed digitally** and are characterized by their **non-rivalrous and non-excludable nature**. This means that one person's consumption of the good does not reduce its availability to others, and it is difficult to prevent people from accessing it. - ex. weather forecast - ex. information about food additives that contribute to cancer

Question 30

When the marginal product of labour is greater than the average product of labour, then the average product of labour must be: a) increasing b) decreasing c) either increasing or decreasing d) constant

Answer 30

a) increasing - The additional output that a firm produces as a result of hiring one more worker is known as the marginal product of labour. The term “marginal” always refers to the next unit of something. In this case, we are referring to the change in output due to hiring another worker. If the marginal product of labour is increasing, then that means it will pull the average product of labour higher since the average product of labour is merely the total output divided by the number of units of labour.

Question 31

# [](http://) __________ equals the firm’s revenues minus all implicit and explicit costs. a) sunk costs b) Economic profit c) Environmental costs d) accounting profit

Answer 31

b) Economic profit Economic profit considers all costs, including out-of-pocket costs and opportunity costs. Explicit costs, or out-of-pocket costs, include wages paid, utilities, and any other purchase made by the firm. Implicit costs include items such as the loss of rental income associated with using a facility instead of renting it to another firm. Accounting profit equals the firm’s revenues minus its explicit costs. Sunk costs are those costs that once made cannot be recovered. For this reason, sunk costs should not be considered in economic decision-making.

Question 32

Which of the following is considered an explicit cost? a) Lost profits on other production options b) Lost wages of a business owner c) The cost of labour d) Lost rental income

Answer 32

c) the cost of labour - Explicit costs, or out-of-pocket costs, include wages paid, utilities, and any other purchase made by the firm. Lost rental income and lost wages are both implicit costs since they do not require the firm to pay money. However, they are relevant opportunity costs for decision-making purposes and should always be considered.

Question 33

producing 550 pizzas costs $2,750. what is the average total cost of producing 550 pizzas?

Answer 33

$5 total cost / quantity produced

Question 34

Which of the following are sometimes called accounting costs? a) Explicit costs b) Normal costs c) Implicit costs d) Economic costs

Answer 34

a) Explicit costs - These are the actual out-of-pocket costs that are tracked and used to determine accounting profitability. For this reason, you often hear them referred to as accounting costs. Economic costs include both the explicit and implicit costs associated with undertaking a specific option. Implicit costs are opportunity costs associated with foregoing some other option.

Question 35

Accounting profits will always be: a) smaller than economic costs b) larger than economic profits c) larger than economic costs d) smaller than economic profits

Answer 35

b) larger than economic profits - Accounting profit **excludes some implicit** costs such as the opportunity cost associated with using a facility instead of renting it to someone else. Since generally accepted accounting practices do not allow the firm to consider these types of costs, the firm’s accounting profits will be larger than the economic profit where these costs are considered.

Question 36

If the number of people in a publishing company does not go up or down with the quantity of books it publishes, then how should we categorize the salaries and benefits paid to these employees? a) As a part of marginal cost b) As a part of variable cost c) As a part of fixed cost d) As an implicit cost

Answer 36

c) As a part of fixed cost - If the number of people in a publishing company does not go up or down with the quantity of books it publishes, then the salaries and benefits paid to these employees should be considered as a part of fixed cost. Fixed costs remain the same regardless of the level of output. The cost of raw materials and components used to manufacture a product are good examples of variable costs. Variable costs are affected by the level of output produced. Variable costs, specifically defined, are those costs that vary with the number of units produced. Implicit costs are nonmonetary opportunity costs. The salaries of these individuals are explicit out-of-pocket fixed costs that do not vary with production.