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Test Bank For Principles and Applications of Economics International Edition 6th Edition

Test Bank For Principles and Applications of Economics International Edition 6th Edition

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Test Bank For Principles and Applications of Economics International Edition 6th Edition

CHAPTER 8—HOW FIRMS MAKE DECISIONS: PROFIT MAXIMIZATION

MULTIPLE CHOICE

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

  1. 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

 

 

  1. 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

 

  1. 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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