CFO Mic12 TB 07

Principles of Microeconomics, 12e, Global Edition (Case/Fair/Oster)
Chapter 7 The Production Process: The Behavior of Profit‐Maximizing Firms
7.1 The Behavior of Profit‐Maximizing Firms
1) Total revenue minus total cost is equal to

A) the rate of return.
B) marginal revenue.
C) profit.
D) net cost.
Answer: C
Diff: 1
Topic: The Behavior of Profit‐Maximizing Firms
Skill: Definition
Learning Outcome: Micro‐9
Refer to the information provided in Figure 7.1 below to answer the following question(s).
Figure 7.1
2) Refer to Figure 7.1. This corn producer produces 100 bushels of corn and sells each bushel at $5. The
cost of producing each bushel is $2. This corn producerʹs total revenue is ________ and profit is ________.
A) $200; $300
B) $300; $200
C) $500; $200
D) $500; $300
Answer: D
Diff: 2
Skill: Analytical
AACSB: Analytical Thinking
1
Copyright © 2017 Pearson Education, Ltd.
3) Refer to Figure 7.1. This corn producer earns a total revenue of $900. Each bushel of corn is sold for $5.
This corn producer must be selling ________ bushels of corn.
A) 180
B) 450
C) 900
D) 4,500
Answer: A
Diff: 2
Skill: Analytical
4) Refer to Figure 7.1. A corn producerʹs profit is $200 and is producing 100 bushels of corn. Then he must
have a cost per bushel of
A) $1.
B) $2.
C) $3.
D) $4.
Answer: C
Diff: 2
Skill: Analytical
5) Refer to Figure 7.1. A corn producer produces 80 bushels of corn and sells each bushel at $5. The cost of
producing each unit bushel is $2. This corn producerʹs total revenue is ________ and profit if ________.
A) $160; $0
B) $240; $80
C) $400; $240
D) $400; $160
Answer: C
Diff: 2
Skill: Analytical
6) Refer to Figure 7.1. A corn producerʹs total revenue is $1,000. If she sells each bushel of corn for $5, she
must be selling ________ bushels of corn.
A) 200
B) 450
C) 900
D) 4,500
Answer: A
Diff: 2
Skill: Analytical
2
7) Refer to Figure 7.1. A corn producerʹs profit is $1,500 and it is producing 500 bushels of output. Then
he must have a cost per bushel of
A) $1.
B) $2.
C) $3.
D) $4.
Answer: B
Diff: 2
Skill: Analytical
8) The Wax Works sells 400 candles at a price of $10 per candle. The Wax Worksʹ total costs for producing
400 candles are $500. The Wax Worksʹ economic profit is
A) ‐$100.
B) $3,500.
C) $4,500.
D) indeterminate from this information.
Answer: B
Diff: 2
Skill: Analytical
9) The Wax Works sells 400 candles at a price of $6 per candle. The Wax Worksʹ total costs for producing
400 candles are $2,500. The Wax Worksʹ economic profit is
A) ‐$100.
B) $0.
C) $2,400.
D) $2,500.
Answer: A
Diff: 2
Skill: Analytical
10) Perfectly competitive firms must make all of the following decisions except
A) how much output to supply.
B) which production technology to use.
C) how much of each input to demand.
D) what price to charge for their output.
Answer: D
Diff: 1
Skill: Conceptual
AACSB: Reflective Thinking
3
11) Economic costs
A) include both a normal rate of return on investment and the opportunity cost of each factor of
production.
B) are equal to the direct costs of hiring all factors of production.
C) are the opportunity cost of each factor of production minus any interest charges paid on borrowed
funds.
D) are equal to total revenue minus accounting profit.
Answer: A
Diff: 2
Skill: Definition
12) The Sweet Success Bakery sells 400 cakes at a price of $10 per cake. Its total economic costs for
producing 400 cakes are $500. The Sweet Success Bakeryʹs economic profits are
A) $100.
B) $3,500.
C) $4,500.
Answer: B
Diff: 2
Skill: Analytical
13) The Oh So Humble Bakery sells 300 muffins at a price of $1 per muffin. Its explicit costs for producing
300 muffins are $250. The Oh So Humble Bakeryʹs economic profits are
A) $35.
B) $50.
C) $250.
Answer: D
Diff: 2
Skill: Analytical
4
14) The Oh So Humble Bakery sells 300 muffins at a price of $1 per muffin. Its explicit costs for producing
300 muffins are $250. If the bakery is earning a normal rate of return, then implicit costs must be
A) $50.
B) $100.
C) $250.
D) $350.
Answer: A
Diff: 2
Skill: Analytical
15) If economic profit is zero, a firm

A) earns a negative rate of return.
B) will leave the industry.
C) earns a positive but below normal rate of return.
D) earns exactly a normal rate of return.
Answer: D
Diff: 2
Skill: Conceptual
16) You own a building that has four possible uses: a cafe, a craft store, a hardware store, and a bookstore.
The value of the building in each use is $2,000; $3,000; $4,000; and $5,000, respectively. You decide to
open a hardware store. The opportunity cost of using this building for a hardware store is
A) $2,000, the value if the building is used as a cafe.
B) $3,000, the value if the building is used as a craft store.
C) $10,000, the sum of the values if the building is used for a cafe, a craft store, or a bookstore.
D) $5,000, the value if you rented the building to someone else to use as a bookstore.
Answer: D
Diff: 3
Skill: Conceptual
5
Refer to Scenario 7.1 below to answer the question(s) that follow.
SCENARIO 7.1: You are the owner and only employee of a company that writes computer software that
is used by gamblers to collect sports data. Last year you earned a total revenue of $90,000. Your costs for
equipment, rent, and supplies were $60,000. To start this business you invested an amount of your own
capital that could pay you a return of $40,000 a year.
17) Refer to Scenario 7.1. During the year your economic costs were
A) $40,000.
B) $60,000.
C) $100,000.
D) $130,000.
Answer: C
Diff: 2
Skill: Analytical
18) Refer to Scenario 7.1. A yearly normal return for your computer software firm would be
A) $20,000.
B) $40,000.
C) $60,000.
D) $100,000.
Answer: B
Diff: 2
Skill: Analytical
19) Refer to Scenario 7.1. Your accounting profit last year was
A) $10,000.
B) $30,000.
C) $50,000.
D) $60,000.
Answer: B
Diff: 2
Skill: Analytical
6
20) Refer to Scenario 7.1. Your economic profit last year was
A) ‐$40,000.
B) ‐$10,000.
C) $10,000.
D) $30,000.
Answer: B
Diff: 2
Skill: Analytical
SCENARIO 7.2: You are the owner and only employee of a company that sets odds for sporting events.
Last year you earned a total revenue of $100,000. Your costs for rent and supplies were $50,000. To start
this business you invested an amount of your own capital that could pay you a return of $20,000 a year.
A) $70,000.
B) $60,000.
C) $50,000.
D) $20,000.
Answer: A
Diff: 2
Skill: Analytical
22) Refer to Scenario 7.2. A yearly normal return for your company is
A) $20,000.
B) $40,000.
C) $60,000.
D) $100,000.
Answer: A
Diff: 2
Skill: Analytical
7
A) $10,000.
B) $30,000.
C) $50,000.
D) $60,000.
Answer: C
Diff: 2
Skill: Analytical
A) ‐$40,000.
B) ‐$10,000.
C) $10,000.
D) $30,000.
Answer: D
Diff: 2
Skill: Analytical
SCENARIO 7.3: Upon graduating with an accounting degree, you open your own accounting firm of
which you are the sole employee. To start the firm you passed on a job offer with a large accounting firm
that offered you a salary of $60,000 annually. Last year you earned a total revenue of $100,000. Rent and
supplies last year were $50,000.
25) Refer to Scenario 7.3. Your annual economic costs are

A) $0.
B) $50,000.
C) $60,000.
D) $110,000.
Answer: D
Diff: 2
Skill: Analytical
8
26) Refer to Scenario 7.3. Your annual economic profit is
A) ‐$10,000.
B) $40,000.
C) $50,000.
D) $100,000.
Answer: A
Diff: 2
Skill: Analytical
27) Refer to Scenario 7.3. Your annual operating profit is

A) ‐$10,000.
B) $40,000.
C) $50,000.
D) $100,000.
Answer: C
Diff: 2
Skill: Analytical
28) There are 100 dog kennels in Atlanta. An economist studying the pricing behavior of dog kennels tells
you that she is limiting her analysis to a time period that does not allow for any new dog kennels to enter
the industry or for any established dog kennels to leave the industry. The time period this economist
referred to is the
A) market period.
B) industry run.
C) long run.
D) short run.
Answer: D
Diff: 2
Skill: Conceptual
29) In the long run,

A) a firm can shut down, but it cannot exit the industry.
B) there are no fixed factors of production.
C) a firm can vary all inputs, but it cannot change the mix of inputs it uses.
D) all firms must make economic profits.
Answer: B
Diff: 3
Skill: Conceptual
9
30) In the short run, a firm
A) has at least one fixed factor of production.
B) can enter an industry where positive profits are being earned.
C) can exit an industry, and all of its factors of production are variable.
D) both B and C are correct.
Answer: A
Diff: 2
Skill: Conceptual
31) Profit is equal to

A) marginal revenue minus marginal cost.
B) total revenue divided by total cost.
C) total revenue minus total cost.
D) total revenue divided by marginal revenue.
Answer: C
Diff: 1
Skill: Definition
32) The Wax Works sells 500 candles at a price of $10 per candle. The Wax Worksʹ total economic costs for
producing 500 candles are $2,000. The Wax Worksʹ economic profit is
A) $2,000.
B) $3,000.
C) $5,000.
Answer: B
Diff: 2
Skill: Analytical
33) The Wax Works sells 500 candles at a price of $5 per candle. The Wax Worksʹ total economic costs for
producing 500 candles are $3,000. The Wax Worksʹ economic profit is
A) ‐$3,000.
B) ‐$500.
C) $2,500.
D) $3,000.
Answer: B
Diff: 2
Skill: Analytical
10
34) The rate of return on capital that is just sufficient to keep owners and investors satisfied is called
A) economic profit.
B) a minimum efficient scale.
C) the price‐earnings ratio.
D) a normal rate of return.
Answer: D
Diff: 1
Skill: Definition
35) The process by which inputs are combined, transformed, and turned into outputs is called
A) production.
B) technology.
C) capitalization.
D) outsourcing.
Answer: A
Diff: 1
Skill: Definition
36) The Sweet Success Bakery sells 500 cakes at a price of $10 per cake. Its total economic costs for
producing 500 cakes are $500. The Sweet Success Bakeryʹs economic profits are
A) $100.
B) $3,500.
C) $4,500.
Answer: C
Diff: 2
Skill: Analytical
37) The Cakery Bakery sells 200 muffins at a price of $2 per muffin. Its explicit costs for producing 200
muffins are $350. The Cakery Bakeryʹs economic profits are
A) $35.
B) $50.
C) $400.
Answer: D
Diff: 2
Skill: Analytical
11
38) The Cakery Bakery sells 200 muffins at a price of $2 per muffin. Its explicit costs for producing 200
muffins are $350. If the bakery is earning a normal rate of return, then its implicit costs must be
A) $0.
B) $50.
C) $350.
D) $400.
Answer: B
Diff: 2
Skill: Analytical
39) A firm ________ if it earns zero economic profit.

A) earns a negative rate of return
B) will leave the industry
C) earns a positive but below normal rate of return
D) earns exactly a normal rate of return
Answer: D
Diff: 2
Skill: Conceptual
40) You own a building that has four possible uses: a tailor shop, a pharmacy, a sports bar, and an antique
mall. The buildingʹs value in each use is $4,000; $6,000; $8,000; and $10,000, respectively. You decide to
open a sports bar. The opportunity cost of using this building for a sports bar is
A) $4,000, the value if the building is used as a tailor shop.
B) $6,000, the value if the building is used as a pharmacy.
C) $20,000, the sum of the values if the building is used for a tailor shop, a pharmacy, or an antique mall.
D) $10,000, the value if you rented the building to someone else to use as an antique mall.
Answer: D
Diff: 3
Skill: Conceptual
12
SCENARIO 7.4: You own and are the only employee of a company that sells custom embroidered pet
sweaters. Last year your total revenue was $120,000. Your costs for equipment, rent, and supplies were
$30,000. To start this business you invested an amount of your own capital that could pay you a $50,000 a
year return.
A) $30,000.
B) $50,000.
C) $80,000.
D) $120,000.
Answer: C
Diff: 2
Skill: Analytical
42) Refer to Scenario 7.4. A yearly normal return for your company would be
A) $40,000.
B) $50,000.
C) $70,000.
D) $90,000.
Answer: B
Diff: 2
Skill: Analytical
A) $20,000.
B) $40,000.
C) $70,000.
D) $90,000.
Answer: D
Diff: 2
Skill: Analytical
13
A) ‐$20,000.
B) $40,000.
C) $70,000.
D) $90,000.
Answer: B
Diff: 2
Skill: Analytical
SCENARIO 7.5: You own and are the only employee of a company that customizes bicycles. Last year
your total revenue was $60,000. Your costs for rent and supplies were $25,000. To start this business you
invested an amount of your own capital that could pay you a $45,000 a year return.
A) $25,000.
B) $35,000.
C) $45,000.
D) $70,000.
Answer: D
Diff: 2
Skill: Analytical
46) Refer to Scenario 7.5. A yearly normal return for your company is
A) $25,000.
B) $35,000.
C) $45,000.
D) $70,000.
Answer: C
Diff: 2
Skill: Analytical
14
A) -$10,000.
B) $15,000.
C) $35,000.
D) $60,000.
Answer: C
Diff: 2
Skill: Analytical
A) ‐$20,000.
B) ‐$10,000.
C) $15,000.
D) $35,000.
Answer: B
Diff: 2
Skill: Analytical
SCENARIO 7.6: Upon graduating with an accounting degree, you open your own accounting firm of
which you and your assistant are the only employees. To start the firm you passed on a job offer with a
large accounting firm that offered you a salary of $50,000 annually. Last year you earned a total revenue
of $120,000. Rent and supplies last year were $50,000. Your assistantʹs salary is $30,000 annually.
49) Refer to Scenario 7.6. Your annual economic costs are

A) $50,000.
B) $80,000.
C) $100,000.
D) $130,000.
Answer: D
Diff: 2
Skill: Analytical
15
50) Refer to Scenario 7.6. Your annual economic profit is
A) ‐$10,000.
B) $20,000.
C) $40,000.
D) $70,000.
Answer: A
Diff: 2
Skill: Analytical
51) Refer to Scenario 7.6. Your annual operating profit is

A) ‐$10,000.
B) $40,000.
C) $70,000.
D) $80,000.
Answer: B
Diff: 2
Skill: Analytical
52) An economist is studying the pricing behavior of Las Vegas all‐you‐can‐eat buffets. He says he will
limit his analysis to a time period that allows for new buffets to enter the market and for existing ones to
leave it. The economist is referring to the ________ time period.
A) market
B) industry
C) long‐run
D) short‐run
Answer: C
Diff: 2
Skill: Conceptual
53) A firm has no fixed factors of production in

A) the short run.
B) the long run.
C) the short run and in the long run.
D) neither the short run nor the long run.
Answer: B
Diff: 2
Skill: Conceptual
16
54) Firms cannot enter an industry in which positive profits are being earned in
A) the short run.
B) the long run.
C) the short run and in the long run.
D) As long as positive profits are being earned, firms can enter the industry in both the short run and the
long run.
Answer: A
Diff: 2
Skill: Conceptual
55) If Harold runs a grocery store and is making a normal rate of return, we can infer that he is also
making an economic profit.
Answer: FALSE
Diff: 2
Skill: Conceptual
56) If a firm makes an economic profit, it is making at least a normal rate of return.
Answer: TRUE
Diff: 2
Skill: Conceptual
57) In the short run, firms can enter an industry but not exit an industry.
Answer: FALSE
Diff: 1
Skill: Conceptual
58) For economic analysis, the short run is considered less than one year.
Answer: FALSE
Diff: 1
Skill: Definition
59) For economic analysis, the long run is any period in which all inputs are variable (regardless of the
length of time involved).
Answer: TRUE
Diff: 1
Skill: Definition
17
60) Deciding to invest in capital is a short‐run decision.
Answer: FALSE
Diff: 1
Skill: Conceptual
61) For a firm, its economic profit is usually greater than its accounting profit.
Answer: FALSE
Diff: 2
Skill: Conceptual
62) One decision that all firms must make is how much output to supply.
Answer: TRUE
Diff: 1
Skill: Conceptual
63) Economic profit accounts for both implicit and explicit costs.
Answer: TRUE
Diff: 1
Skill: Conceptual
64) Economists consider the long run as a period of more than one year.
Answer: FALSE
Diff: 1
Skill: Definition
65) The optimal method of production maximizes cost for a given level of output.
Answer: FALSE
Diff: 1
Skill: Definition
18
66) Firms make decisions with the goal of maximizing total revenue.
Answer: FALSE
Diff: 1
Skill: Conceptual
7.2 The Production Process
1) To determine the optimal method of production for a good or service, a perfectly competitive firm
needs to know all of the following except
A) the market price of output.
B) the technologies of production that are available to the firm.
C) the prices of inputs.
D) the prices charged by its rivals.
Answer: D
Diff: 2
Topic: The Production Process
Skill: Conceptual
2) The optimal method of production is the one that

A) maximizes output regardless of cost.
B) maximizes inputs.
C) minimizes cost.
D) minimizes the normal rate of return.
Answer: C
Diff: 2
Skill: Conceptual
3) An act of production, as economists use the term, is demonstrated by which of the following?
A) A worker places money in a pension fund.
B) A local nonprofessional theater company performs a play.
C) An individual buys municipal bonds to avoid taxes.
D) A firm buys a pre‐existing building in order to expand its operations.
Answer: B
Diff: 2
Skill: Conceptual
19
Use the information provided in Table 7.1 below to answer the question(s) that follow.
Table 7.1
Inputs Required to Produce a Product Using Alternative Technologies
4) Refer to Table 7.1. Which technology is the most labor intensive?

A) A
B) B
C) C
D) D
Answer: A
Diff: 2
Skill: Analytical
5) Refer to Table 7.1. Which technology is the most capital intensive?

A) A
B) B
C) C
D) D
Answer: D
Diff: 2
Skill: Analytical
6) Refer to Table 7.1. If the hourly wage rate is $7 and the hourly price of capital is $10, which production
technology should be selected?
A) A
B) B
C) C
D) D
Answer: C
Diff: 2
Skill: Analytical
20
A) A
B) B
C) C
D) D
Answer: B
Diff: 2
Skill: Analytical
Table 7.2Inputs Required to Produce a Product Using Alternative Technologies

A) A
B) B
C) C
D) D
Answer: A
Diff: 2
Skill: Analytical
A) A
B) B
C) C
D) D
Answer: D
Diff: 2
Skill: Analytical
21
10) Refer to Table 7.2. If the hourly price of labor is $10 and the hourly price of capital is $1, which
production technology should be selected?
A) A
B) B
C) C
D) D
Answer: A
Diff: 2
Skill: Analytical
A) A
B) B
C) C
D) D
Answer: D
Diff: 2
Skill: Analytical
12) Refer to Table 7.2. Which technology is the least capital intensive?
A) A
B) B
C) C
D) D
Answer: D
Diff: 2
Skill: Analytical
13) Refer to Table 7.2. If the hourly price of capital is $30 and the hourly wage rate is $5, which production
A) A
B) B
C) C
D) D
Answer: C
Diff: 2
Skill: Analytical
22
14) Refer to Table 7.2. If the hourly price of capital is $10 and the hourly price of labor is $20, which
A) A
B) B
C) C
D) D
Answer: A
Diff: 2
Skill: Analytical
15) Refer to Table 7.2. Which technology is the least labor intensive?
A) A
B) B
C) C
D) D
Answer: A
Diff: 2
Skill: Analytical
23
Refer to the information provided in Figure 7.2 below to answer the question(s) that follow.
Figure 7.2
16) Refer to Figure 7.2. The marginal product of the second worker is ________ lawns mowed.
A) 3
B) 5
C) 8
D) 11
Answer: B
Diff: 2
Skill: Analytical
17) Refer to Figure 7.2. The average product with two workers is ________ lawns mowed.
A) 4
B) 5
C) 5.5
D) 11
Answer: A
Diff: 2
Skill: Analytical
18) Refer to Figure 7.2. The marginal product of the first worker is ________ lawns moved.
A) 3
B) 4
C) 5
D) 11
Answer: A
Diff: 2
Skill: Analytical
24
19) Refer to Figure 7.2. The average product of the first worker is ________ lawns moved.
A) 3
B) 4
C) 5
D) 11
Answer: A
Diff: 2
Skill: Analytical
SCENARIO 7.7: A lawn service company has the following production possibilities. With one, two, three,
and four workers, the company can mow 4, 9, 12, and 14 lawns per day, respectively.
20) Refer to Scenario 7.7. The marginal product of the second worker is
A) 3.
B) 4.
C) 5.
D) 9.
Answer: C
Diff: 2
Skill: Analytical
21) Refer to Scenario 7.7. The marginal product of the third worker is
A) 2.
B) 3.
C) 4.
D) 12.
Answer: B
Diff: 2
Skill: Analytical
25
22) Refer to Scenario 7.7. The marginal product of the fourth worker is
A) 2.
B) 3.
C) 12.
D) 14.
Answer: A
Diff: 2
Skill: Analytical
23) Refer to Scenario 7.7. Diminishing returns to labor set in with the ________ worker.
A) first
B) second
C) third
D) fourth
Answer: C
Diff: 2
Skill: Analytical
24) Refer to Scenario 7.7. The average product of labor with three workers is
A) 3.
B) 3.5.
C) 4.
D) 12.
Answer: C
Diff: 2
Skill: Analytical
25) Refer to Scenario 7.7. The average product of labor with four workers is
A) 3.
B) 3.5.
C) 4.
D) 14.
Answer: B
Diff: 2
Skill: Analytical
26
Figure 7.3
26) Refer to Figure 7.3. The marginal product of the second worker is ________ yards raked.
A) 2
B) 13.5
C) 17
D) 27
Answer: C
Diff: 2
Skill: Analytical
27) Refer to Figure 7.3. The average product with two workers is ________ yards raked.
A) 4
B) 13.5
C) 14
D) 27
Answer: B
Diff: 2
Skill: Analytical
28) Refer to Figure 7.3. The marginal product of the first worker is ________ yards raked.
A) 10
B) 13.5
C) 17
D) 27
Answer: A
Diff: 2
Skill: Analytical
27
29) Refer to Figure 7.3. The average product of the first worker is ________ yards raked.
A) 4
B) 10
C) 14
D) 27
Answer: B
Diff: 2
Skill: Analytical
30) When Burger Barn hires one worker, 20 customers can be served in an hour. When Burger Barn hires
two workers, 50 customers can be served in an hour. The marginal product of the second worker is
________ customers served per hour.
A) 15
B) 30
C) 40
D) 67.5
Answer: B
Diff: 2
Skill: Analytical
31) The marginal products of the first, second, and third workers are 20, 12, and 8, respectively. If four
workers can produce 45 units of output, then the marginal product of the fourth worker is
A) 4.
B) 5.
C) 40.
D) 45.
Answer: B
Diff: 2
Skill: Analytical
28
32) At the Pampered Pet Salon the marginal products of the first, second, and third workers are 20, 16,
and 10 dogs washed, respectively. The total product (number of dogs washed) of the first two workers is
A) 16.
B) 20.
C) 36.
D) 46.
Answer: C
Diff: 2
Skill: Analytical
and 10 dogs washed, respectively. The total product (number of dogs washed) of the three worker is
A) 15.33.
B) 30.
C) 46.
D) 138.
Answer: C
Diff: 2
Skill: Analytical
34) At the Larson Bakery the marginal products of the first, second, and third sales clerks are 20, 17, and
11 customers served, respectively. The total product (number of customers served) of the first two sales
clerks is
A) 3.
B) 17.
C) 37.
D) 48.
Answer: C
Diff: 2
Skill: Analytical
29
11 customers served, respectively. The total product (number of customers served) of the three sales
clerks is
A) 11.
B) 40.
C) 46.
D) 48.
Answer: D
Diff: 2
Skill: Analytical
Figure 7.4
36) Refer to Figure 7.4. The marginal product of the second worker is
A) 10.
B) 16.
C) 20.
D) 32.
Answer: C
Diff: 2
Skill: Analytical
30
37) Refer to Figure 7.4. The marginal product of the fourth worker is
A) 8.
B) 12.5.
C) 48.
D) 92.
Answer: A
Diff: 2
Skill: Analytical
38) Refer to Figure 7.4. The marginal product of the sixth worker is
A) ‐50.
B) ‐5.
C) 5.
D) 8.33.
Answer: B
Diff: 2
Skill: Analytical
39) Refer to Figure 7.4. The average product with three workers is
A) 10.
B) 14.
C) 30.
D) 126.
Answer: B
Diff: 2
Skill: Analytical
40) Refer to Figure 7.4. The average product with five workers is
A) 1.
B) 2.5.
C) 5.
D) 11.
Answer: D
Diff: 2
Skill: Analytical
31
41) Refer to Figure 7.4. The average product with six workers is
A) ‐8.33.
B) ‐5.
C) 5.
D) 8.33.
Answer: D
Diff: 2
Skill: Analytical
42) Refer to Figure 7.4. Diminishing marginal returns begin when the ________ worker is hired.
A) first
B) second
C) third
D) fifth
Answer: C
Diff: 2
Skill: Analytical
43) Refer to Figure 7.4. The marginal product of the first worker is
A) 12.
B) 16.
C) 20.
D) 32.
Answer: A
Diff: 2
Skill: Analytical
44) Refer to Figure 7.4. The marginal product of the third worker is
A) 10.
B) 28.67.
C) 32.
D) 42.
Answer: A
Diff: 2
Skill: Analytical
32
45) Refer to Figure 7.4. The marginal product of the fifth worker is
A) 0.
B) 5.
C) 11.
D) 55.
Answer: B
Diff: 2
Skill: Analytical
46) Refer to Figure 7.4. The average product of two workers is

A) 10.
B) 16.
C) 22.
D) 44.
Answer: B
Diff: 2
Skill: Analytical
47) Refer to Figure 7.4. The average product of four workers is

A) 2.
B) 12.5.
C) 20.
D) 34.
Answer: B
Diff: 2
Skill: Analytical
48) Refer to Figure 7.4. The average product of six workers is

A) ‐8.33.
B) ‐5.
C) 5.
D) 8.33.
Answer: D
Diff: 2
Skill: Analytical
33
49) If diminishing marginal returns have already set in for The Picture Perfect Framing Store and the
marginal product of the fifth picture framer is 20, then the marginal product of the sixth picture framer
must be
A) negative.
B) zero.
C) less than 20.
D) greater than 20.
Answer: C
Diff: 2
Skill: Conceptual
50) If labor is a variable input in production, the law of diminishing marginal returns implies that in the
short run,
A) laborʹs marginal product is constant.
B) laborʹs marginal product decreases after a certain point.
C) total product is negative.
D) total product is negative after a certain point has been reached.
Answer: B
Diff: 2
Skill: Conceptual
34
Figure 7.5
51) Refer to Figure 7.5. Diminishing marginal returns set in after the ________ worker is hired.
A) first
B) fifth
C) eighth
D) sixteenth
Answer: B
Diff: 2
Skill: Analytical
52) Refer to Figure 7.5. Increasing returns continue until the ________ worker is hired.
A) first
B) fifth
C) eighth
D) sixteenth
Answer: B
Diff: 2
Skill: Analytical
53) If the marginal product of labor is less than the average product of labor, then the
A) marginal product must be increasing.
B) average product must be decreasing.
C) marginal product must be decreasing.
D) Both B and C
Answer: D
Diff: 2
Skill: Conceptual
35
54) The version of the law of diminishing returns that applies to production
A) implies that as we add more workers, our output decreases.
B) applies only in the short run.
C) is true only when all inputs are variable.
D) applies in the short and long run.
Answer: B
Diff: 2
Skill: Conceptual
Refer to the information provided in the table below to answer the following question.
Table 7.3
55) Refer to Table 7.3. Suppose output varies, ceteris paribus, with labor input in the following manner
displayed above. After how many units of labor do diminishing returns set in?
A) 3
B) 4
C) 5
D) They do not set in.
Answer: D
Diff: 2
Skill: Analytical
56) When total product is maximized, marginal product

A) and average product are zero.
B) is positive, but average product is zero.
C) is zero, but average product is positive.
D) and average product are positive.
Answer: C
Diff: 2
Skill: Conceptual
36
57) At the point where total product is maximized, marginal product
A) is zero, but average product is still positive.
B) and average product are negative.
C) is positive, but average product is negative.
D) and average product are positive.
Answer: A
Diff: 2
Skill: Conceptual
58) If marginal product is greater than average product, then

A) average product must be decreasing.
B) marginal product must be decreasing.
C) marginal product must be increasing.
D) marginal product could either be increasing or decreasing.
Answer: D
Diff: 2
Skill: Conceptual
59) If we assume that labor is the only variable input, the slope of the total product curve in the short run
A) has no economic significance.
B) measures the average product of labor.
C) measures the marginal product of labor.
D) measures both the marginal and average product at all points on the total product curve.
Answer: C
Diff: 2
Skill: Conceptual
60) You own a business that answers telephone calls for physicians after their offices close. You have an
incentive to substitute capital for labor if the
A) price of capital increases.
B) price of labor decreases.
C) price of capital decreases.
D) marginal product of labor increases.
Answer: C
Diff: 1
Skill: Conceptual
37
61) Firms have an incentive to substitute labor for capital as the
A) price of capital increases.
B) price of capital decreases.
C) price of labor increases.
D) marginal product of labor decreases.
Answer: A
Diff: 1
Skill: Conceptual
Figure 7.6
62) Refer to Figure 7.6. The shoe manufacturer currently produces 50 units of output. If this shoe
manufacturer increases labor from 15 to 20, the marginal product of the 20th worker
A) is zero, as the total number of shoes produced remains at 50.
B) is 8.5, as capital can be reduced by 8.5 units when the 20th worker is hired.
C) cannot be determined because output remains constant.
D) cannot be determined because both capital and labor have been increased.
Answer: C
Diff: 2
Skill: Analytical
38
63) Refer to Figure 7.6. If the price of capital is $10 and the price of labor is $20, the optimal production
technique is
A) A.
B) B.
C) C.
D) D.
Answer: A
Diff: 2
Skill: Conceptual
64) Refer to Figure 7.6. If this shoe manufacturer increases labor from 20 to 25 (moving along the given
isoquant with Q = 50), the marginal product of the 25th worker
A) is zero, as the total number of shoes produced remains at 50.
B) is 7.5, as capital can be reduced by 7.5 units when the 25th worker is hired.
C) cannot be determined because output remains constant.
D) cannot be determined because both capital and labor have been increased.
Answer: C
Diff: 2
Skill: Analytical
65) Refer to Figure 7.6. If the price of capital is $20 and the price of labor is $10, the optimal product
technique is
A) A.
B) B.
C) C.
D) D.
Answer: D
Diff: 2
Skill: Analytical
39
66) Assume that the price of labor and capital have remained the same, but that the average educational
level of workers has increased and therefore the productivity of labor has increased. This would lead a
firm to
A) use a more capital‐intensive production technology.
B) use a more labor‐intensive technology.
C) not change its production technology, but to produce fewer units of output.
D) use only labor to produce the product.
Answer: B
Diff: 2
Skill: Conceptual
67) Assume that capital and labor are complementary inputs. If the firm increases the amount of capital it
employs, this would
A) cause the firm to move down along the MP schedule for labor.
B) cause the firm to move up along its MP schedule for labor.
C) shift the firmʹs MP schedule for labor to the left.
D) shift the firmʹs MP schedule for labor to the right.
Answer: D
Diff: 2
Skill: Conceptual
68) The cost‐minimizing equilibrium condition can be written as

A) MPL = MPK.
B) PL = PK.
C) (MPL)(PL) = (MPK)(PK).
D) MPL/PL = MPK/PK.
Answer: D
Diff: 3
Skill: Conceptual
40
69) A firm is operating such that the marginal product of labor is 10 and the marginal product of capital is
20. The firm is minimizing its costs only if
A) the wage is half the rental rate.
B) the rental rate is half the wage.
C) since capital is more productive than labor, the firm must be minimizing cost.
D) Given this information, the firm canʹt be minimizing cost under any circumstances.
Answer: A
Diff: 3
Skill: Conceptual
70) A firm produces 5 units of output from the last dollar it spends on labor and 10 units from the last
dollar spent on capital. The firm should
A) employ more labor and less capital.
B) employ more capital and less labor.
C) employ more capital and labor.
D) employ less capital and labor.
Answer: B
Diff: 2
Skill: Conceptual
71) If the product derived from the last dollar spent on labor is greater than the product derived from the
last dollar spent on capital, then the firm
A) is minimizing costs.
B) should use more labor and less capital to minimize costs.
C) should use less labor and more capital to minimize costs.
D) should increase the price paid to labor and decrease the price paid to capital to minimize costs.
Answer: B
Diff: 2
Skill: Conceptual
72) If the product derived from the last dollar spent on labor is less than the product derived from the last
dollar spent on capital, then the firm
A) is minimizing costs.
B) should use more labor and less capital to minimize costs.
C) should use less labor and more capital to minimize costs.
D) should increase the price paid to labor and decrease the price paid to capital to minimize costs.
Answer: C
Diff: 2
Skill: Conceptual
41
73) If Microsoft is earning a rate of return greater than the return necessary for the business to continue
operations in the long run, then
A) total costs exceed total revenue.
B) total costs exceed a normal rate of return.
C) the normal rate of return is zero.
D) the firm is earning an economic profit.
Answer: D
Diff: 1
Skill: Conceptual
74) If Pets.com is earning a rate of return less than necessary for the business to continue operations, then
A) total revenue exceeds economic costs.
B) economic costs exceed total revenue.
C) normal profit is zero.
D) economic profit is zero.
Answer: B
Diff: 1
Skill: Conceptual
75) You are certain that a normal rate of return is 18% for the computer industry. What do you expect for
a normal rate of return in the computer software industry, which is considered to be much riskier than
the computer industry?
A) 18%
B) Less than 18%
C) Above 18%
D) The rate on government bonds
Answer: C
Diff: 1
Skill: Conceptual
76) The formula for the marginal product of labor is

A) L/q.
B) (ΔL)(Δq).
C) q/L.
D) Δq/ΔL.
Answer: D
Diff: 1
Skill: Definition
42
77) Assume the total product of two workers is 100 and the total product of three workers is 120. The
average product of three workers is ________, and the marginal product of the third worker is ________.
A) 40; 20
B) 20; 100
C) 13.33; 6.67
D) 120; 100
Answer: A
Diff: 2
Skill: Analytical
A) 40; 10
B) 50; 20
C) 13.33; 6.67
D) 120; 100
Answer: B
Diff: 2
Skill: Analytical
A) 10; 45
B) 30; 10
C) 10; 13.33
D) 160; 270
Answer: B
Diff: 2
Skill: Analytical
80) Assume the total product of three workers is 120 and the total product of four workers is 160. The
average product of four workers is ________, and the marginal product of the fourth worker is ________.
A) 10; 40
B) 30; 10
C) 40; 40
D) 160; 40
Answer: C
Diff: 2
Skill: Analytical
43
81) When Burning Bobʹs Salsa House hires one worker, 30 customers can be served in an hour. When
Burning Bobʹs Salsa House hires two workers, 50 customers can be served in an hour. The marginal
product of the second worker is ________ customers served per hour.
A) 20
B) 30
C) 50
D) 67.5
Answer: A
Diff: 2
Skill: Analytical
82) What is the formula for the average product of labor?

A) Δq/ΔL
B) ΔL/Δq
C) q/L
D) L/q
Answer: C
Diff: 1
Skill: Definition
83) If the marginal product of labor equals the average product of labor, then the
A) average product is maximized.
B) marginal product is maximized.
C) marginal product is still increasing.
D) average product is still increasing.
Answer: A
Diff: 2
Skill: Conceptual
84) Assume that the relative prices of capital and labor have not changed. As a firmʹs expenditures for
capital and labor increase, its isocost line
A) shifts out parallel to the original isocost line.
B) shifts in parallel to the original isocost line.
C) rotates outward on the Y‐intercept.
D) rotates outward on the X‐intercept.
Answer: A
Diff: 2
Skill: Conceptual
44
85) Assume that the relative prices of capital and labor have not changed. As a firmʹs expenditures for
capital and labor decrease, its isocost line
A) shifts out parallel to the original isocost line.
B) shifts in parallel to the original isocost line.
C) rotates outward on the Y‐intercept.
D) rotates outward on the X‐intercept.
Answer: B
Diff: 2
Skill: Conceptual
86) Related to the Economics in Practice on page 150: For pineapple farmers in Ghana, the choice of how
much fertilizer to use was highly dependent on how much fertilizer their more successful neighbor
farmers used. This process of technology adoption is referred to as
A) trial and error.
B) capital‐intensive adaptation.
C) social learning.
D) mass production.
Answer: C
Diff: 2
Topic: The Production Process: Economics in Practice
Skill: Conceptual
87) The quantitative relationship between inputs and outputs is called

A) consumer technology.
B) labor‐intensive technology.
C) capital‐intensive technology.
D) production technology.
Answer: D
Diff: 2
Skill: Conceptual
88) Firms in an economy with high labor costs have an incentive to use more ________ techniques.
A) labor‐intensive
B) capital‐intensive
C) capital‐saving
D) labor‐dependent
Answer: B
Diff: 2
Skill: Conceptual
45
89) Firms in an economy with high capital costs have an incentive to use more ________ techniques.
A) labor‐intensive
B) capital‐intensive
C) labor‐saving
D) capital‐dependent
Answer: A
Diff: 2
Skill: Conceptual
Table 7.4
Inputs Required to Produce a Product Using Alternative Technologies
Technology Units of Capital Number of Employees

A 8 36
B 12 24
C 16 16
D 24 12
A) A
B) B
C) C
D) D
Answer: A
Diff: 2
Skill: Analytical
A) A
B) B
C) C
D) D
Answer: D
Diff: 2
Skill: Analytical
46
92) Refer to Table 7.4. If the hourly price of capital is $20 and the hourly wage rate is $14, which
A) A
B) B
C) C
D) D
Answer: C
Diff: 2
Skill: Analytical
93) Refer to Table 7.4. If the hourly price of capital is $40 and the hourly wage rate is $10, which
A) A
B) B
C) C
D) D
Answer: A
Diff: 2
Skill: Analytical
SCENARIO 7.8: A swimming pool cleaning company has the following production possibilities. With
one, two, three, and four workers, the company can clean 5, 12, 17, and 20 pools per day, respectively.
94) Refer to Scenario 7.8. The marginal product of the second worker is
A) 3.
B) 5.
C) 7.
D) 12.
Answer: C
Diff: 2
Skill: Analytical
47
95) Refer to Scenario 7.8. The marginal product of the third worker is
A) 4.
B) 5.
C) 12.
D) 17.
Answer: B
Diff: 2
Skill: Analytical
96) Refer to Scenario 7.8. The marginal product of the fourth worker is
A) 2.
B) 3.
C) 17.
D) 20.
Answer: B
Diff: 2
Skill: Analytical
97) Refer to Scenario 7.8. Diminishing returns to labor set in with the ________ worker.
A) first
B) second
C) third
D) fourth
Answer: C
Diff: 2
Skill: Analytical
98) Refer to Scenario 7.8. The average product of labor with three workers is
A) 333.
B) 3.5.
C) 5.67.
D) 11.33.
Answer: C
Diff: 2
Skill: Analytical
48
99) Refer to Scenario 7.8. The average product of labor with four workers is
A) 3.
B) 3.3.
C) 5.
D) 13.5.
Answer: C
Diff: 2
Skill: Analytical
100) When Burger Barn hires one worker, 10 customers can be served in an hour. When Burger Barn hires
two workers, 25 customers can be served in an hour. The marginal product of the second worker is
________ customers served per hour.
A) 15
B) 30
C) 40
D) 67.5
Answer: A
Diff: 2
Skill: Analytical
101) The marginal products of the first, second, and third workers are 50, 34, and 22, respectively. If four
workers can produce 116 units of output, then the marginal product of the fourth worker is ________.
A) 10
B) 12
C) 22
D) 116
Answer: A
Diff: 2
Skill: Analytical
and 25 dogs washed, respectively. The total product (number of dogs washed) of the first two workers is
A) 11.
B) 50.
C) 86.
D) 111.
Answer: C
Diff: 2
Skill: Analytical
49
and 25 dogs washed, respectively. The total product (number of dogs washed) of the three workers is
A) 50.
B) 86.
C) 107.
D) 111.
Answer: D
Diff: 2
Skill: Analytical
21 customers served, respectively. The total product (number of customers served) of the first two sales
clerks is
A) 6.
B) 17.
C) 57.
D) 78.
Answer: C
Diff: 2
Skill: Analytical
21 customers served, respectively. The total product (number of customers served) of the three sales
clerks is
A) 30.
B) 57.
C) 78.
D) 109.
Answer: C
Diff: 2
Skill: Analytical
50
106) If diminishing marginal returns have already set in for Danicaʹs Dog Training Emporium and the
marginal product of the fifth dog trainer is 18, then the marginal product of the fourth dog trainer must
be
A) negative.
B) zero.
C) less than 18.
D) greater than 18.
Answer: D
Diff: 2
Skill: Conceptual
107) If capital is a variable input in production, the law of diminishing marginal returns implies that in
the short run,
A) capitalʹs marginal product is constant.
B) capitalʹs marginal product decreases after a certain point.
C) total product is negative.
D) total product is negative after a certain point has been reached.
Answer: B
Diff: 2
Skill: Conceptual
108) If the marginal product of labor is greater than the average product of labor, then the
A) marginal product must be increasing.
B) average product must be increasing.
C) marginal product must be decreasing.
D) average product must be decreasing.
Answer: B
Diff: 2
Skill: Conceptual
109) Average product of labor is calculated as

A) (total product) × (total units of labor).
B) (total product) / (total units of labor).
C) (total units of labor) / (total product).
D) (marginal product) / (total product).
Answer: B
Diff: 1
Skill: Definition
51
Refer to the information provided in Table 7.5 below to answer the question that follows.
Table 7.5
L 0 1 2 3 4 5
Q 0 15 30 45 60 75
110) Refer to Table 7.5. Suppose output varies, ceteris paribus, with labor input in the manner displayed in
the table above. After how many units of labor do diminishing returns set in?
A) 3
B) 4
C) 5
D) They do not set in.
Answer: D
Diff: 2
Skill: Analytical
111) When a firm maximizes total product in the short run, average product is
A) zero.
B) negative.
C) positive.
D) Any of the above can be correct.
Answer: C
Diff: 2
Skill: Conceptual
112) At the point where total product is ________, marginal product is zero, but average product is still
positive.
A) maximized
B) minimized
C) zero
D) negative
Answer: A
Diff: 2
Skill: Conceptual
52
113) If marginal product is less than average product, then
A) average product must be increasing.
B) marginal product must be decreasing.
C) marginal product must be increasing.
D) marginal product could either be increasing or decreasing.
Answer: B
Diff: 2
Skill: Conceptual
114) If we assume that labor is the only variable input, the slope of the short‐run ________ curve
measures the marginal product of labor.
A) average product
B) marginal product
C) total product
D) total cost
Answer: C
Diff: 2
Skill: Conceptual
115) You own a business that distributes restaurant menus to houses and apartments. You have an
incentive to substitute labor for capital if the
A) price of capital decreases.
B) price of labor decreases.
D) marginal product of labor decreases.
Answer: B
Diff: 1
Skill: Conceptual
116) Firms have an incentive to substitute capital for labor as the

A) price of labor decreases.
B) price of capital increases.
D) marginal product of labor increases.
Answer: C
Diff: 1
Skill: Conceptual
53
117) The specific technology chosen by a profit‐maximizing clothing manufacturer depends on
A) input prices.
B) output prices.
C) demand for the output.
D) supply of the output.
Answer: A
Diff: 2
Skill: Conceptual
118) Assume the prices of labor and capital remain the same, but the average educational level of workers
decreases and therefore labor productivity decreases. This would lead a firm to
A) use a more capital‐intensive production technology.
B) use a more labor‐intensive technology.
C) not change its production technology, but produce fewer units of output.
D) use only capital to produce the product.
Answer: A
Diff: 2
Skill: Conceptual
119) Assume that capital and labor are complementary inputs. If the firm decreases the amount of capital
it employs, this would
A) cause the firm to move down along the MP schedule for labor.
B) cause the firm to move up along its MP schedule for labor.
C) shift the firmʹs MP schedule for labor to the left.
D) shift the firmʹs MP schedule for labor to the right.
Answer: C
Diff: 2
Skill: Conceptual
120) The equation (MPL/PL) = (MPK/PK) represents

A) profit maximization.
B) cost minimization.
C) the short‐run production function.
D) diminishing marginal returns.
Answer: B
Diff: 2
Skill: Conceptual
54
121) A firm is operating such that the marginal product of labor is 48 and the marginal product of capital
is 12. The firm is minimizing its costs only if
A) the wage is one fourth the rental rate.
B) the rental rate is one fourth the wage.
C) since capital is more productive than labor, the firm must be minimizing cost.
D) Given this information the firm canʹt be minimizing cost under any circumstances.
Answer: B
Diff: 3
Skill: Conceptual
122) A firm produces 15 units of output from the last dollar it spends on labor and 10 units from the last
dollar spent on capital. The firm should
A) employ more labor and less capital.
B) employ more capital and less labor.
C) employ more capital and labor.
D) employ less capital and labor.
Answer: A
Diff: 2
Skill: Conceptual
123) To minimize costs, a firm should use more labor and less capital if the product derived from the last
dollar spent on labor is ________ the product derived from the last dollar spent on capital.
A) less than
B) greater than
C) equal to
D) either greater than or less than
Answer: B
Diff: 2
Skill: Conceptual
124) To minimize costs, a firm should use more capital and less labor if the product derived from the last
dollar spent on labor is ________ the product derived from the last dollar spent on capital.
A) less than
B) greater than
C) equal to
D) either greater than or less than
Answer: A
Diff: 2
Skill: Conceptual
55
125) If a company is earning a rate of return less than the return necessary for the business to continue
operations in the long run, then
A) total revenue exceeds total costs.
B) total costs are less than a normal rate of return.
C) the firmʹs normal rate of return is zero.
D) the firm is suffering an economic loss.
Answer: D
Diff: 1
Skill: Conceptual
126) If Overstock.com earns a rate of return exactly equal to what is necessary for it to continue
operations, then its
A) total revenue exceeds its economic costs.
B) economic costs exceed its total revenue.
C) normal profit is zero.
D) economic profit is zero.
Answer: D
Diff: 1
Skill: Conceptual
127) You are certain that the restaurant industryʹs normal rate of return is 12%. You would expect a(n)
________ normal rate of return for a soft drink manufacturing industry that people consider much less
risky than the restaurant industry.
A) 12%
B) less than 12%
C) above 12%
D) risk free (the rate on government bonds)
Answer: B
Diff: 1
Skill: Conceptual
128) The formula Δq/ΔL represents

A) total product.
B) the average product of labor.
C) the capital‐to‐labor ratio.
D) the marginal product of labor.
Answer: D
Diff: 1
Skill: Definition
56
three workersʹ average product is ________ while the third workerʹs marginal product is ________.
A) 80; 40
B) 40; 80
C) 100; 100
D) 300; 200
Answer: C
Diff: 2
Skill: Analytical
three workerʹs average product is ________ while the third workerʹs marginal product is ________.
A) 40; 10
B) 40; 20
C) 50; 10
D) 120; 110
Answer: A
Diff: 2
Skill: Analytical
three workerʹs average product is ________ while the third workerʹs marginal product is ________.
A) 20; 60
B) 60; 20
C) 20; 26.67
D) 320; 540
Answer: B
Diff: 2
Skill: Analytical
57
132) Assume the total product of three workers is 60 and the total product of four workers is 80. The four
workerʹs average product is ________ while the fourth workerʹs marginal product is ________.
A) 5; 15
B) 15; 5
C) 20; 20
D) 80; 20
Answer: C
Diff: 2
Skill: Analytical
133) Hannahʹs House of Hotcakes serves 30 customers in an hour when it hires one worker. It serves 60
customers in an hour when it hires two workers. The marginal product of the second worker is ________
customers served per hour.
A) 20
B) 30
C) 50
D) 67.5
Answer: B
Diff: 2
Skill: Analytical
134) The formula q/L represents

A) total product.
B) the average product of labor.
C) the capital‐to‐labor ratio.
D) the marginal product of labor.
Answer: B
Diff: 1
Skill: Definition
135) When the marginal product of labor ________ the average product of labor, then the average product
is maximized.
A) equals
B) is greater than
C) is less than
D) The average product of labor is never maximized.
Answer: A
Diff: 2
Skill: Conceptual
58
136) A firmʹs isocost line shifts parallel outward from the original isocost line as its
A) total cost for capital and labor increases.
B) total cost for capital and labor decreases.
C) total cost for capital increases and its total cost for labor decreases.
D) total cost for capital decreases and its total cost for labor increases.
Answer: A
Diff: 2
Skill: Conceptual
137) A firmʹs isocost line shifts parallel inward from the original isocost line as its
A) total cost for capital and labor increases.
B) total cost for capital and labor decreases.
C) total cost for capital increases and its total cost for labor decreases.
D) total cost for capital decreases and its total cost for labor increases.
Answer: B
Diff: 2
Skill: Conceptual
138) Related to the Economics in Practice on page 150: For pineapple farmers in Ghana, the choice of how
much fertilizer to use was highly dependent on social learning, where the farmers based their decisions
on
A) the amount of fertilizer they used for their previously‐grown maize crops.
B) the amount of fertilizer they were given by the government.
C) how much fertilizer their more successful neighbor farmers used.
D) the expected value of their future pineapple crops.
Answer: C
Diff: 1
Topic: The Production Process: Economics in Practice
Skill: Fact
139) If the first worker produces five custom picture frames a day, and the second worker produces five
additional custom picture frames a day, it is clear that diminishing marginal returns have not yet set in.
Answer: TRUE
Diff: 2
Skill: Analytical
59
140) One worker produces 5 rocking chairs. To produce 10 rocking chairs it will be necessary to hire more
than two workers, if diminishing returns have set in.
Answer: TRUE
Diff: 1
Skill: Conceptual
141) A production function shows the least amount that a firm will produce given the amount of labor
input.
Answer: FALSE
Diff: 1
Skill: Conceptual
142) If the marginal product of labor is less than the average product of labor, then the average product of
labor is increasing.
Answer: FALSE
Diff: 2
Skill: Conceptual
143) If the first worker produces ten custom picture frames a day, and the second worker produces
twelve additional custom picture frames a day, then diminishing marginal returns have not yet set in.
Answer: TRUE
Diff: 2
Skill: Analytical
144) One worker produces 10 rocking chairs. If diminishing returns have already set in, a firm will need
to hire more than two workers to produce 20 rocking chairs.
Answer: TRUE
Diff: 1
Skill: Conceptual
60
145) A production function shows the greatest amount that a firm will produce given the amount of labor
input.
Answer: TRUE
Diff: 1
Skill: Conceptual
146) The additional output that can be produced by adding one additional unit of a specific input is called
marginal product.
Answer: TRUE
Diff: 1
Skill: Definition
7.3 Choice of Technology
1) Costs of production are determined

A) only by the technologies that are available.
B) only by the input prices that are available.
C) by the technologies that are available and by input prices.
D) by the technologies that are available and by the demand for the output.
Answer: C
Diff: 1
Topic: Choice of Technology
Skill: Conceptual
2) Related to the Economics in Practice on page 151: Which of the following is the best analysis of the
question of how fast delivery truck drivers should drive in order to reduce costs?
A) They should drive as quickly as possible in order to make more deliveries per day.
B) They should drive at the most fuel‐efficient rate in order to reduce fuel consumption costs.
C) They should balance the concerns of speed and fuel efficiency and drive at a speed that minimizes
total expenses.
D) They should drive as close to the legal speed limit as possible.
Answer: C
Diff: 3
Topic: Choice of Technology: Economics in Practice
Skill: Analytical
61
3) Related to the Economics in Practice on page 151: Which of the following would be most likely to make it
more efficient for delivery trucks to drive more quickly?
A) an increase in the hourly wage of truck drivers and a decrease in the cost of gasoline
B) an increase in the hourly wage of truck drivers and an increase in the cost of gasoline
C) a decrease in the hourly wage of truck drivers and a decrease in the cost of gasoline
D) a decrease in the hourly wage of truck drivers and an increase in the cost of gasoline
Answer: A
Diff: 2
Skill: Conceptual
4) Factors of production such as labor and capital

A) are complementary.
B) are substitutable.
C) can be complements and also substitutes.
D) can be neither complements nor substitutes.
Answer: C
Diff: 1
Skill: Conceptual
5) Related to the Economics in Practice on page 151: You own a truck and use it to deliver merchandise to
retailers and hire a driver to make such deliveries. The speed at which you instruct the driver to drive
depends on
A) the driverʹs wage only.
B) the price of gasoline only.
C) the driverʹs wage and the price of gasoline.
D) neither the driverʹs wage nor the price of gasoline.
Answer: C
Diff: 2
Skill: Conceptual
62
6) Related to the Economics in Practice on page 151: Suppose you own a truck and use it to deliver
merchandise to retailers and hire a driver to make such deliveries. At higher rates of speed the truck gets
fewer miles per gallon of gas. Holding all else constant, as the price of gasoline continues to rise
A) you will instruct your driver to drive faster.
B) you will instruct your driver to drive slower.
C) you will ask your driver to change their driving in any way.
D) you will make more deliveries to cover the increasing cost of fuel.
Answer: B
Diff: 1
Skill: Conceptual
7) A key decision that all firms make is which technology to use in the production of their products.
Answer: TRUE
Diff: 1
Skill: Conceptual
8) The flexibility of a firmʹs techniques of production is an important determinant of its costs.

Answer: TRUE
Diff: 1
Skill: Conceptual
7.4 Appendix: Isoquants and Isocosts
1) A graph showing all the combinations of capital and labor that can be used to produce a given amount
of output is a(n)
A) indifference curve.
B) isoquant.
C) isocost line.
D) production function.
Answer: B
Diff: 1
Topic: Appendix: Isoquants and Isocosts
Skill: Definition
63
Figure 7.7
2) Refer to Figure 7.7 above. If Roller Skates Unlimited moves from isoquant A to isoquant B, the number
of roller skates produced
A) decreases.
B) increases.
C) remains constant, but Roller Skates Unlimited uses more capital and more labor.
D) remains constant, but input prices have risen.
Answer: B
Diff: 2
Skill: Analytical
3) Refer to Figure 7.7 above. If Roller Skates Unlimited moves from isoquant B to isoquant A, the number
of roller skates produced
A) decreases.
B) increases.
C) remains constant, but Roller Skates Unlimited uses more capital and more labor.
D) remains constant, but input prices have risen.
Answer: A
Diff: 2
Skill: Analytical
64
4) Isoquants are downward sloping because
A) as more units of an input are used to produce a product, total cost increases.
B) as more units of an input are used to produce a product, the firmʹs marginal productivity increases.
C) if more of one input is used, then less of the other input must be used to keep output constant.
D) Both B and C
Answer: C
Diff: 2
Skill: Conceptual
5) A graph showing all the combinations of capital and labor available for a given total cost is the
A) isocost line.
B) isoquant.
C) budget constraint.
D) expenditure set.
Answer: A
Diff: 1
Skill: Definition
Figure 7.8
6) Refer to Figure 7.8. If the price of capital is $20, then along isocost line AB total cost is
A) $300.
B) $1,200.
C) $2,400.
D) indeterminate from this information, as the price of labor is not given.
Answer: B
Diff: 2
Skill: Analytical
65
7) Refer to Figure 7.8. The firm is currently along isocost CD. If the price of capital is $10, then the price of
labor is
A) $10.
B) $20.
C) $80.
Answer: A
Diff: 2
Skill: Analytical
8) Refer to Figure 7.8. The firm is currently along isocost CE. If the price of capital is $12, then the price of
labor is
A) $8.
B) $12.
C) $80.
D) $120.
Answer: A
Diff: 2
Skill: Analytical
9) Refer to Figure 7.8. The firmʹs isocost line would shift from CD to CE if
A) the price of capital fell.
B) the firmʹs total expenditure on inputs increased.
C) the price of labor fell.
D) either the price of labor fell or the firmʹs total expenditure on inputs increased.
Answer: C
Diff: 2
Skill: Analytical
10) Refer to Figure 7.8. The slope of isocost AB is

A) ‐1.
B) 0.
C) 1.
D) indeterminate from this information, as the prices of capital and labor are not given.
Answer: A
Diff: 2
Skill: Analytical
66
11) Refer to Figure 7.8. The slope of isocost CD is
A) ‐1.
B) ‐2/3.
C) 0.
Answer: A
Diff: 2
Skill: Analytical
12) Refer to Figure 7.8. The slope of isocost CE is

A) ‐1.
B) ‐2/3.
C) 0.
Answer: B
Diff: 2
Skill: Analytical
13) Refer to Figure 7.8 The firmʹs isocost line could shift from CD to AB if
A) the price of capital increased.
B) the firmʹs total expenditures increased by 25%.
C) the price of capital and labor each increased by 25%.
D) the firmʹs total expenditures decreased by 25% or the price of capital and labor each increased by 33%.
Answer: D
Diff: 2
Skill: Analytical
14) Refer to Figure 7.8 The firmʹs isocost line could shift from AB to CD if
B) the firmʹs total expenditures decreased by 25%.
C) the price of capital and labor each decreased by 33%.
D) the firmʹs total expenditures increased by 33% or the price of capital and labor each decreased by 25%.
Answer: D
Diff: 2
Skill: Analytical
67
15) Refer to Figure 7.8. The general formula for the slope of any of the isocost lines is
A) ‐PK/PL.
B) ‐PL/PK.
C) TC/PL.
D) TC/PK.
Answer: B
Diff: 1
Skill: Definition
A) $300.
B) $1,200.
C) $2,400.
Answer: C
Diff: 2
Skill: Analytical
A) $1,200.
B) $1,500.
C) $2,000.
D) indeterminate from this information since the price of labor is not given.
Answer: B
Diff: 2
Skill: Analytical
18) Refer to Figure 7.8. The firm is currently along isocost CD. If the price of capital is $25, then the price
of labor is
A) $1.
B) $25.
C) $80.
D) indeterminate from the information given.
Answer: B
Diff: 2
Skill: Analytical
68
19) Refer to Figure 7.8. The firm is currently along isocost CE. If the price of capital is $24, then the price
of labor is
A) $16.
B) $24.
C) $80.
D) $120.
Answer: A
Diff: 2
Skill: Analytical
20) Refer to Figure 7.8. The firmʹs isocost line would shift from CE to CD if
B) the price of labor increased.
C) the firmʹs total expenditure on inputs increased.
D) either the price of labor increased or the firmʹs total expenditure on inputs increased.
Answer: B
Diff: 2
Skill: Analytical

A) greater than the slope of isocost CD.
B) less than the slope of isocost CD.
C) equal to the slope of isocost CD.
Answer: C
Diff: 2
Skill: Analytical

A) greater than the slope of isocost AB.
B) less than the slope of isocost AB.
C) equal to the slope of isocost AB.
Answer: C
Diff: 1
Skill: Analytical
69
23) Refer to Figure 7.8. The firm is currently along isocost CE. If the price of labor is $24, then the price of
labor is
A) $16.
B) $24.
C) $36.
D) $80.
Answer: C
Diff: 2
Skill: Analytical
24) Refer to Figure 7.8. The firmʹs isocost line could shift from CD to CE if the
A) price of labor increased.
B) firmʹs total expenditures increased by 50%.
C) price of labor decreased by 50%.
D) firmʹs total expenditures increased by 50% or the price of capital and labor each decreased by 33%.
Answer: C
Diff: 2
Skill: Analytical
25) Refer to Figure 7.8 The firmʹs isocost line could shift from CE to CD if
C) the price of labor increased by 33%.
D) the firmʹs total expenditures decreased by 33% or the price of capital and labor each increased by 50%.
Answer: C
Diff: 2
Skill: Analytical
26) Refer to Figure 7.8. The firm is currently along isocost CE. If the price of labor is $60, then the price of
labor is
A) $40.
B) $60.
C) $80.
D) $90.
Answer: D
Diff: 2
Skill: Analytical
70
A) $1,200.
B) $1,800.
C) $2,400.
Answer: B
Diff: 2
Skill: Analytical
Figure 7.9
of labor is
A) $4.
B) $30.
C) $180.
Answer: B
Diff: 2
Skill: Analytical
71
29) Refer to Figure 7.9. The firmʹs isocost line would shift from CE to CD if
A) the price of capital rises.
B) the firmʹs total expenditure on inputs decreased.
C) the price of labor rises.
D) either the price of labor fell or the firmʹs total expenditure on inputs decreased.
Answer: C
Diff: 2
Skill: Analytical

A) ‐1.
B) 0.
C) 1.
Answer: A
Diff: 2
Skill: Analytical
31) Refer to Figure 7.9. The slope of isocost CE is

A) ‐1/2.
B) ‐1.
C) ‐2.
Answer: A
Diff: 2
Skill: Analytical
32) Refer to Figure 7.9. The firmʹs isocost line could shift from AB to CD if
A) the price of capital decreased.
B) the firmʹs total expenditures increased by 50%.
C) the price of capital and labor each decreased by 33.3%.
D) either B or C
Answer: D
Diff: 2
Skill: Analytical
72
of labor is
A) $6.
B) $40.
C) $240.
Answer: B
Diff: 2
Skill: Analytical
34) Refer to Figure 7.9. The firmʹs isocost line would shift from CD to CE if
A) the price of capital falls.
B) the price of labor falls.
C) the firmʹs total expenditure on inputs increases.
D) either the price of labor rises or the firmʹs total expenditure on inputs increases.
Answer: B
Diff: 2
Skill: Analytical

A) greater than the slope of isocost CD.
B) less than the slope of isocost CD.
C) equal to the slope of isocost CD.
Answer: C
Diff: 2
Skill: Analytical

A) greater than the slope of isocost AB.
B) less than the slope of isocost AB.
C) equal to the slope of isocost AB.
Answer: C
Diff: 2
Skill: Analytical
73
37) Refer to Figure 7.9. The firm is currently along isocost CD. If the price of labor is $42, then the price of
capital is
A) $21.
B) $42.
C) $63.
D) $84.
Answer: B
Diff: 2
Skill: Analytical
38) Refer to Figure 7.9. The firmʹs isocost line could shift from CD to AB if
C) the price of capital and labor each increased by 33%.
D) either B or C
Answer: B
Diff: 2
Skill: Analytical
74
Figure 7.10
39) Refer to Figure 7.10. If this firmʹs cost of capital is $20 per unit and its cost of labor is $10 per unit, the
isocost line represents a total cost of
A) $2,000.
B) $3,000.
C) $4,000.
D) $8,000.
Answer: A
Diff: 2
Skill: Analytical
40) Refer to Figure 7.10. The slope of the isocost line is

A) ‐2.
B) ‐1/2.
C) 1/2.
D) 2.
Answer: B
Diff: 2
Skill: Analytical
75
41) Refer to Figure 7.10. At Point C, the absolute value of the slope of q2 = 200 is
A) less than 2.
B) exactly equal to 2.
C) greater than 2.
Answer: A
Diff: 2
Skill: Analytical
42) Refer to Figure 7.10. At Point C, the slope of q2 = 200 is

A) ‐2.
B) ‐1/2.
C) ‐1.
Answer: B
Diff: 2
Skill: Analytical
43) Refer to Figure 7.10. If the firmʹs level of total cost is represented by the given isocost line, the firmʹs
optimal combination of capital and labor is given by
A) point A.
B) point B.
C) point C.
D) 50 units of capital and 50 of labor.
Answer: C
Diff: 2
Skill: Analytical
44) Refer to Figure 7.10. The firmʹs level of total cost is represented by the given isocost line. At the
optimal combination of capital and labor, the firm produces ________ units of output.
A) 100.
B) 200.
C) 300.
Answer: B
Diff: 2
Skill: Analytical
76
A) $1,000.
B) $2,000.
C) $3,000.
D) $4,000.
Answer: A
Diff: 2
Skill: Analytical
46) Refer to Figure 7.10. The slope of the isocost line (in absolute value) is
A) greater than 1.
B) less than one.
C) equal to 1.
D) equal to 0.
Answer: B
Diff: 2
Skill: Analytical
47) Refer to Figure 7.10. At Point C the slope of the q2 = 200 isoquant is
A) ‐2.
B) ‐1/2.
C) ‐1.
Answer: B
Diff: 2
Skill: Analytical
48) Refer to Figure 7.10. At Point A the absolute value of the slope of the q1 = 100 isoquant is
A) less than 2.
B) exactly equal to 2.
C) greater than 2.
Answer: C
Diff: 2
Skill: Analytical
77
A) $1,000.
B) $2,000.
C) $3,000.
D) $4,000.
Answer: D
Diff: 2
Skill: Analytical
50) Refer to Figure 7.10. If the isocost line represents a total cost of $2,400, then the firmʹs cost of capital is
________ per unit and its cost of labor is ________ per unit.
A) $10; $20
B) $12; $24
C) $24; $12
D) $2; $1
Answer: C
Diff: 2
Skill: Analytical
78
Figure 7.11
51) Refer to Figure 7.11. If the firmʹs cost of capital is $30 per unit and its cost of labor is $60 per unit, the
A) $2,000.
B) $3,000.
C) $6,000.
D) $8,000.
Answer: C
Diff: 2
Skill: Analytical
52) Refer to Figure 7.11. The slope of the isocost line is

A) ‐2.
B) ‐1/2.
C) 1/2.
D) 2.
Answer: A
Diff: 2
Skill: Analytical
79
53) Refer to Figure 7.11. At Point C, the slope of isoquant q2 = 200 is
A) ‐2.
B) ‐1/2.
C) ‐1.
Answer: A
Diff: 2
Skill: Analytical
54) Refer to Figure 7.11. If the firmʹs level of total cost is represented by the given isocost line, the firmʹs
optimal combination of capital and labor is given by
A) point A.
B) point B.
C) point C.
D) 50 units of capital and 50 of labor.
Answer: C
Diff: 2
Skill: Analytical
A) $2,000.
B) $3,000.
C) $6,000.
D) $8,000.
Answer: B
Diff: 2
Skill: Analytical
A) $2,400.
B) $3,600.
C) $4,800.
D) $7,200.
Answer: C
Diff: 2
Skill: Analytical
80
57) Refer to Figure 7.11. If the isocost line represents a total cost of $7,200, the firmʹs cost of capital is
________ per unit and its cost of labor is ________ per unit.
A) $36; $72
B) $144; $72
C) $72; $36
D) $200; $100
Answer: A
Diff: 2
Skill: Analytical
58) Refer to Figure 7.11. If the firmʹs cost of capital is $18 per unit, then its cost of labor is ________ per
unit.
A) $1.80
B) $9
C) $36
D) $900
Answer: C
Diff: 2
Skill: Analytical
59) The least costly way to produce any given level of output is indicated by
A) the point of intersection between the isoquant corresponding to that level of output and the Y‐axis.
B) the point of intersection between the isoquant corresponding to that level of output and the X‐axis.
C) the point of tangency between an isocost line and the isoquant corresponding to that level of output.
D) the isocost line corresponding to that level of output.
Answer: C
Diff: 2
Skill: Conceptual
60) The point of tangency between an isocost line and an isoquant is necessarily
A) the profit‐maximizing combination of inputs that should be hired to produce that output level.
B) the least costly combination of inputs that can be hired to produce the output level.
C) both the profit‐maximizing and least costly combination of inputs that can be used to produce the
output level.
D) the minimum amount of output that can be attained for that level of expenditure.
Answer: B
Diff: 2
Skill: Conceptual
81
61) The total cost curve for a firm can be derived from isoquants and isocost lines by
A) varying the prices of capital and labor and keeping total expenditure constant.
B) varying production technologies, but keeping input prices and expenditure levels constant.
C) varying total expenditures while keeping input prices and production technology constant.
D) varying the price of either capital or labor while keeping total expenditures and production
technology constant.
Answer: C
Diff: 3
Skill: Conceptual
62) The slope of the isoquant is

A) ‐MPL/MPK.
B) the marginal rate of technical substitution.
C) negative.
D) All of the above are correct.
Answer: D
Diff: 1
Skill: Definition
63) A graph showing ________ is an isoquant.

A) all combinations of capital and labor that have the same total cost
B) all combinations of capital and labor that a firm can use to produce a given amount of output
C) all combinations of products desired by consumers
D) all combinations of products that yield the same total utility
Answer: B
Diff: 1
Skill: Definition
64) The higher the level of output, the farther ________ the isoquant will lie.
A) up and to the right
B) down and to the right
C) up and to the left
D) down and to the left
Answer: A
Diff: 2
Skill: Conceptual
82
65) The marginal rate of technical substitution is the ratio of
A) the marginal product of labor to the marginal product of capital.
B) capital to labor.
C) capital to the price of capital.
D) labor to the price of labor.
Answer: A
Diff: 1
Skill: Definition
66) The ________ to produce any given level of output is indicated by the point of tangency between an
isocost line and the isoquant corresponding to that level of output.
A) only possible way
B) most costly way
C) least costly way
D) least desirable way
Answer: C
Diff: 2
Skill: Conceptual
67) At each point of tangency for isoquants and isocost lines, the slope of the isoquant must be ________
the slope of the isocost line.
A) greater than
B) less than
C) equal to
D) the reciprocal of
Answer: C
Diff: 2
Skill: Conceptual
68) A total cost curve shows the ________ of producing each level of output.
A) marginal cost
B) minimum cost
C) maximum cost
D) optimal input combination
Answer: B
Diff: 2
Skill: Conceptual
83
69) The slope of the ________ is ‐MPL/MPK.
A) isoquant
B) total utility curve
C) isocost line
D) marginal utility curve
Answer: A
Diff: 2
Skill: Definition
84

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Principles of Microeconomics, 12e, Global Edition (Case/Fair/Oster)

Chapter 7 The Production Process: The Behavior of Profit‐Maximizing Firms

7.1 The Behavior of Profit‐Maximizing Firms

1) Total revenue minus total cost is equal to

15) If economic profit is zero, a firm

Refer to Scenario 7.2 below to answer the question(s) that follow.

Refer to Scenario 7.3 below to answer the question(s) that follow.

25) Refer to Scenario 7.3. Your annual economic costs are

27) Refer to Scenario 7.3. Your annual operating profit is

29) In the long run,

31) Profit is equal to

39) A firm ________ if it earns zero economic profit.

Refer to Scenario 7.5 below to answer the question(s) that follow.

Refer to Scenario 7.6 below to answer the question(s) that follow.

49) Refer to Scenario 7.6. Your annual economic costs are

51) Refer to Scenario 7.6. Your annual operating profit is

53) A firm has no fixed factors of production in

7.2 The Production Process

2) The optimal method of production is the one that

4) Refer to Table 7.1. Which technology is the most labor intensive?

5) Refer to Table 7.1. Which technology is the most capital intensive?

Table 7.2Inputs Required to Produce a Product Using Alternative Technologies

8) Refer to Table 7.2. Which technology is the most capital intensive?

Refer to Scenario 7.7 below to answer the question(s) that follow.

46) Refer to Figure 7.4. The average product of two workers is

47) Refer to Figure 7.4. The average product of four workers is

48) Refer to Figure 7.4. The average product of six workers is

56) When total product is maximized, marginal product

58) If marginal product is greater than average product, then

68) The cost‐minimizing equilibrium condition can be written as

76) The formula for the marginal product of labor is

82) What is the formula for the average product of labor?

87) The quantitative relationship between inputs and outputs is called

Technology Units of Capital Number of Employees

Refer to Scenario 7.8 below to answer the question(s) that follow.

109) Average product of labor is calculated as

116) Firms have an incentive to substitute capital for labor as the

120) The equation (MPL/PL) = (MPK/PK) represents

128) The formula Δq/ΔL represents

134) The formula q/L represents

7.3 Choice of Technology

1) Costs of production are determined

4) Factors of production such as labor and capital

8) The flexibility of a firmʹs techniques of production is an important determinant of its costs.

7.4 Appendix: Isoquants and Isocosts

10) Refer to Figure 7.8. The slope of isocost AB is

12) Refer to Figure 7.8. The slope of isocost CE is

21) Refer to Figure 7.8. The slope of isocost AB is

22) Refer to Figure 7.8. The slope of isocost CD is

30) Refer to Figure 7.9. The slope of isocost AB is

31) Refer to Figure 7.9. The slope of isocost CE is

35) Refer to Figure 7.9. The slope of isocost AB is

36) Refer to Figure 7.9. The slope of isocost CD is

40) Refer to Figure 7.10. The slope of the isocost line is

42) Refer to Figure 7.10. At Point C, the slope of q2 = 200 is

52) Refer to Figure 7.11. The slope of the isocost line is

62) The slope of the isoquant is

63) A graph showing ________ is an isoquant.

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