Overview
Chapter 11
The Firm: Production and Costs
True/False
1. Economic profit always exceeds accounting profit.
ANS: F
PTS: 1
2. Ray Tucker has run his company, Tucker’s Towing and Wrecking, for two years and has made an accounting profit of $34,000 each year. As long as Tucker’s Towing continues to make accounting profits, it is rational to remain in the towing business.
ANS: F
PTS: 1
3. An economic profit of zero indicates a satisfactory situation for the firm.
ANS: T
PTS: 1
4. One would expect to observe a diminishing marginal product of labor when crowded office space reduces the productivity of new workers.
ANS: T
PTS: 1
5. A Texas oil woman would like to increase the oil produced from her oil fields. Since it takes over a year to drill new wells, she opts instead for increasing labor and other variable inputs to produce more oil from existing wells. She is making a short-run production decision.
ANS: T
PTS: 1
6. The period of time that is too short for the firm to change the quantity of certain resources used in production, known as fixed inputs, is called the short run.
ANS: T
PTS: 1
7. Economists define the long run as any production time period lasting over one year.
ANS: F
PTS: 1
8. In the short run, all costs are variable.
ANS: F
PTS: 1
9. In the short run, some costs are fixed.
ANS: T
PTS: 1
10. In the long run, all costs are variable.
ANS: T
PTS: 1
11. The total fixed cost of operating a lumberyard equals $12,000 this year. The average fixed cost of the lumberyard will not be affected by the quantity of lumber that is sold.
ANS: F
PTS: 1
12. Total cost equals total variable cost plus marginal cost.
ANS: F
PTS: 1
13. When marginal cost exceeds the average variable cost, average variable cost must be increasing.
ANS: T
PTS: 1
14. When marginal cost is increasing, average total cost must be increasing.
ANS: F
PTS: 1
15. The law of diminishing marginal product provides an explanation for why average total cost eventually increases as output is expanded in the short run.
ANS: T
PTS: 1
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