Chapter 1: Managers, Profits, and Markets
Chapter 3: Marginal analysis for Optimal Decisions
the correct answers are marked red.
1 Economic theory is a valuable tool for business decision making because it
a. identifies for managers the essential information for making a decision. b. assumes away the problem.
c. creates a realistic, complex model of the business firm. d. provides an easy solution to complex business problems.
2 Economic profit is
a. the difference between total revenue and the opportunity cost of all of the resources used in production. b. the difference between total revenue and the implicit costs of using owner-supplied resources. c. the difference between accounting profit and the opportunity cost of the market-supplied resources used by the firm. d. the difference between accounting profit and explicit costs.
3 Consider a firm that employs some resources that are owned by the firm. When accounting profit is zero, economic profit
a. must also equal zero.
b. is sure to be positive.
c. must be negative and shareholder wealth is reduced.
d. cannot be computed accurately, but the firm is breaking even nonetheless.
4 Suppose Marv, the owner-manager of Marv’s Hot Dogs, earned $72,000 in revenue last year. Marv’s explicit costs of operation totaled $36,000. Marv has a Bachelor of Science degree in mechanical engineering and could be earning $30,000 annually as mechanical engineer.
a. Marv's implicit cost of using owner-supplied resources is $36,000. b. Marv's economic profit is $36,000.
c. Marv’" s implicit cost of using owner-supplied resources is $30,000. d. Marv's economic profit is $6,000.
e. both c and d.
5 Owners of a firm want the managers to make business decisions that will
a. maximize the value of the firm.
b. maximize expected profit in each period of operation. c. maximize the market share of the firm.
d. both a and b are correct when revenue and cost conditions in one time period are independent of revenues and costs in future time periods. e. choices a and b are generally not equivalent, so managers must always seek to maximize market share.
6 When a firm is a price-taking firm,
a. the price of the product it sells is determined by the intersection of the market demand and supply curves for the product. b. raising the price of the product above the market-determined price will cause sales to fall nearly to zero. c. many other firms produce a product that is identical to the output produced by the rest of the firms in the industry. d. all of the above
7 Economic profit is the best measure of a firm’s performance because
a. normal profit is generally too difficult to measure.
b. economic profit fully accounts for all sources of revenue. c. only explicit costs influence managerial decisions since, in general, only explicit costs can be subtracted from revenue for the purposes of computing taxable profit. d. the opportunity cost of using ALL resources is subtracted from total revenue.
8 Which of the following is an example of an implicit cost for a firm?
a. the value of time worked by the owner.
b. any wages and salaries paid to employed.
c. forgone rent on property owned by firm.
d. both a and c
e. all of the above
9 St. Charles Hospital, located in an upper-income neighborhood of a large city, recently received a restored mansion as a gift from an appreciative patient. The board of directors decided to remodel the mansion and use it as recuperative quarters for patients willing to pay a premium for luxurious accommodations. The cost to the hospital of using the mansion includes
a. nothing because it was a gift.
b. how much the hospital pays for upkeep--taxes, insurance, utilities, maintenance, etc. c. how much the hospital would receive if it rented or sold the mansion. d. both b and c