Description
Test Bank For Principles and Applications of Economics International Edition 6th Edition
CHAPTER 8—HOW FIRMS MAKE DECISIONS: PROFIT MAXIMIZATION
MULTIPLE CHOICE
- Economists assume that the goal of the firm is to
| a. | maximize total revenue |
| b. | maximize profits |
| c. | minimize costs |
| d. | equate total revenue and total cost |
| e. | break even in the long run |
ANS: B PTS: 1 DIF: Difficulty: Easy
NAT: BUSPROG: Analytic STA: DISC: Marginal costs & benefits
TOP: The Goal of Profit Maximization KEY: Bloom’s: Knowledge
- To develop a useful picture of a firm’s behavior, economists assume that the
| a. | firm’s goal is to maximize total revenue |
| b. | firm’s goal is to maximize profit |
| c. | firm’s goal is to minimize marginal cost |
| d. | roles of owner, manager and worker are performed by the same individuals |
| e. | roles of owner, manager, and worker are interchangeable |
ANS: B PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic STA: DISC: Marginal costs & benefits
TOP: The Goal of Profit Maximization KEY: Bloom’s: Knowledge
- The behavior of firms is best understood by focusing on
| a. | money profit |
| b. | economic profit |
| c. | accounting profit |
| d. | economic profit minus implicit costs |
| e. | money profit minus explicit costs |
ANS: B PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic STA: DISC: Marginal costs & benefits
TOP: The Goal of Profit Maximization KEY: Bloom’s: Knowledge
- Economic profit is another name for accounting profit.
| a. | True |
| b. | False |
ANS: B PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic STA: DISC: Marginal costs & benefits
TOP: Understanding Profit KEY: Bloom’s: Knowledge
- Accounting profit is defined as
| a. | total revenue minus the opportunity cost |
| b. | total revenue minus all costs of production |
| c. | total revenue minus explicit costs |
| d. | the sum of marginal revenues received from all units produced |
| e. | the difference between marginal revenue and marginal cost |
ANS: C PTS: 1 DIF: Difficulty: Easy
NAT: BUSPROG: Analytic STA: DISC: Marginal costs & benefits
TOP: Understanding Profit KEY: Bloom’s: Knowledge
- The difference between accounting profit and economic profit relates to
| a. | the manner in which revenues are defined |
| b. | how total revenue is calculated |
| c. | the market structure for the firm’s industry |
| d. | the price of the good in the market |
| e. | the manner in which costs are defined |
ANS: E PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic STA: DISC: Marginal costs & benefits
TOP: Understanding Profit KEY: Bloom’s: Comprehension
- When there are implicit costs of production,
| a. | accounting and economic profit are equal |
| b. | opportunity costs of production are zero |
| c. | explicit costs of production are small |
| d. | accounting profit will exceed economic profit |
| e. | economic profit will exceed accounting profit |
ANS: D PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic STA: DISC: Marginal costs & benefits
TOP: Understanding Profit KEY: Bloom’s: Comprehension
- Myron worked at a factory where he earned $20,000 per year. One day, 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 economic profit?
| a. | $10,000 |
| b. | $30,000 |
| c. | $60,000 |
| d. | $20,000 |
| e. | $50,000 |
ANS: A PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic STA: DISC: Marginal costs & benefits
TOP: Understanding Profit KEY: Bloom’s: Analysis
- 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?
| a. | $10,000 |
| b. | $20,000 |
| c. | $40,000 |
| d. | $30,000 |
| e. | $60,000 |
ANS: D PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic STA: DISC: Marginal costs & benefits
TOP: Understanding Profit KEY: Bloom’s: Analysis
- If a firm has an accounting profit of $2,350,000 and implicit costs totaling $150,000, then its economic profit equals
| a. | $2,350,000 |
| b. | $2,500,000 |
| c. | $2,200,000 |
| d. | $150,000 |
| e. | $2,000,000 |
ANS: C PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic STA: DISC: Marginal costs & benefits
TOP: Understanding Profit KEY: Bloom’s: Analysis
- 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
| a. | $94,400 |
| b. | $79,400 |
| c. | $4,400 |
| d. | $3,500 |
| e. | $19,400 |
ANS: B PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic STA: DISC: Marginal costs & benefits
TOP: Understanding Profit KEY: Bloom’s: Analysis
- 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. If William bills 500 hours of consulting time in the first year, he earns an economic profit equal to
| a. | $55,600 |
| b. | -$15,000 |
| c. | -$19,400 |
| d. | -$34,400 |
| e. | $41,500 |
ANS: C PTS: 1 DIF: Difficulty: Challenging
NAT: BUSPROG: Analytic STA: DISC: Marginal costs & benefits
TOP: Understanding Profit KEY: Bloom’s: Analysis
- All of the following, except one, are included in the profit earned by a firm’s owners. Which is the exception?
| a. | the reward for developing new products |
| b. | the reward for moving an established business into new geographic markets |
| c. | the reward for risk-taking |
| d. | salaries that compensate for the owners’ time |
| e. | dividend payments to the stockholders |
ANS: D PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic STA: DISC: Marginal costs & benefits
TOP: Understanding Profit KEY: Bloom’s: Comprehension
| Figure 8-1 | |
| Total Sales Revenue | $120,000 |
| Cost of Row Materials | $ 30,000 |
| Wages and Salaries | $ 20,000 |
| Utilities | $ 5,000 |
| Rent | $ 25,000 |
- Henry decides to quit his job (earning $50,000 per year), take his $60,000 in savings, and open a dry cleaning store. Figure 8-1 shows the revenues and expenditures for his first year of operation. If Henry could have earned $3,000 in interest on the money used to open the store, his accounting profit would have been
| a. | -$13,000 |
| b. | -$3,000 |
| c. | $20,000 |
| d. | $40,000 |
| e. | $37,000 |
ANS: D PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic STA: DISC: Marginal costs & benefits
TOP: Understanding Profit KEY: Bloom’s: Analysis
- Henry decides to quit his job (earning $50,000 per year), take his $60,000 in savings, and open a dry cleaning store. Figure 8-1 shows the revenues and expenditures for his first year of operation. If Henry could have earned $3,000 in interest on the money used to open the store, his economic profit would have been
| a. | -$13,000 |
| b. | -$3,000 |
| c. | $40,000 |
| d. | $120,000 |
| e. | $37,000 |
ANS: A PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic STA: DISC: Marginal costs & benefits
TOP: Understanding Profit KEY: Bloom’s: Analysis
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