Deck 10: Organizing Production

Question 1

The implicit rental rate

A)is the firm's opportunity cost of using the capital it owns.
B)is paid with cash.
C)has two components: economic depreciation and foregone interest.
D)both A and C are correct.
E)both B and C are correct.

Answer 1

both A and C are correct.

Question 2

Marc bought a new car last year for $10,000.He can now sell the car for $8,500.To buy this year's model of the same car he would have to pay $11,000.What is the one-year amount of economic depreciation?

A)$2,500
B)$1,500
C)$1,000
D)$10,000
E)$3,500

Answer 2

$1,500

Question 3

In general,
(1) opportunity cost is greater than accounting cost.
(2) opportunity cost is less than accounting cost.
(3) economic profit is greater than accounting profit.
(4) economic profit is less than accounting profit.

A)1 only
B)1 and 3
C)1 and 4
D)2 and 3
E)2 and 4

Answer 3

1 and 4

Question 4

The implicit rental rate to a firm of owning a building is

A)the sum of economic depreciation and foregone interest.
B)economic depreciation only.
C)foregone interest only.
D)the cost of using an alternative building.
E)the rent paid on the building.

Question 5

A firm's opportunity cost includes

A)the cost of using resources bought in the market and owned by the firm only.
B)the cost of using resources bought in the market, owned by the firm, and supplied by the firm's owner.
C)only costs that are paid in cash or by cheque.
D)the cost of using resources supplied by the firm's owner only.
E)economic profit.

Question 6

Marc bought a new car last year for $10,000.He can now sell the car for $8,500.To buy this year's model of the same car he would have to pay $11,000.What is the implicit rental rate using the car for one year at a zero percent interest rate?

A)$2,500
B)$3,500
C)$1,000
D)$10,000
E)$1,500

Question 7

The difference in the market value of a new car and the market value of the same car one year later is

A)economic depreciation.
B)physical depreciation.
C)economic deterioration.
D)physical deterioration.
E)conventional depreciation.

Question 8

Which one of the following statements about the implicit rental rate of capital is true?

A)It is the market value of capital.
B)It is the opportunity cost to a firm of using its own capital.
C)It includes normal profit.
D)It is the amount paid for the use of land or buildings.
E)It is the depreciated value of capital.

Question 9

Gerald is a freelance writer who could work for a newspaper at $25,000 a year but instead runs his own business making revenue of $40,000 a year.His only business expenses are $1,000 for writing materials and $12,000 for rent.What is Gerald's economic profit from working as a freelance writer?

A)$2,000
B)$28,000
C)$15,000
D)$25,000
E)$27,000

Question 10

Firm A can produce a unit of output with 10 hours of labour and 5 units of capital.Firm B can produce a unit of output with 5 hours of labour and 10 units of capital.Firm C can produce a unit of output with 10 hours of labour and 10 units of capital.If the prices of labour and material are $10 and $5,respectively which firm is technologically efficient?

A)A only
B)B only
C)C only
D)A and B
E)A and C

Question 11

A firm's goal is to

A)maximize revenue.
B)maximize cost while minimizing revenue.
C)maximize profit.
D)minimize costs.
E)minimize risk.

Question 12

Which one of the following is included in the implicit rental rate of capital?

A)economic depreciation
B)the cost of electricity
C)the cost of raw materials
D)the cost of low-skilled labour
E)the cost of heating

Question 13

Normal profit is the ________.Normal profit ________ part of a firm's opportunity cost because ________.

A)return that an entrepreneur can expect to receive on the average;is;it is the cost of a foregone alternative, which is running another firm
B)profit used by the Canada Revenue Agency to calculate tax owing;is;part of it must be paid to the government and is no longer available to the entrepreneur
C)profit used by the Canada Revenue Agency to calculate tax owing;is;it is paid in cash
D)return that an entrepreneur can expect to receive on the average;is not;it is not paid in cash
E)profit used by the Canada Revenue Agency to calculate tax owing;is;it includes depreciation

Question 14

Economic depreciation is

A)the same as depreciation calculated by an accountant.
B)equal to economic profit minus normal profit.
C)the change in the market value of capital over a given period.
D)the deterioration of the physical appearance of a capital.
E)paid in cash.

Question 15

If economic profit is equal to zero then the firm is making

A)a normal profit.
B)zero profit as recorded by accountants.
C)negative profit as recorded by accountants.
D)zero taxable income.
E)an amount equal to the implicit rental rate.

Question 16

A firm's total opportunity cost of production is the sum of the cost of using resources

A)bought in the market.
B)owned by the firm.
C)supplied by the firm's owner.
D)bought in the market and supplied by the firm's owner.
E)bought in the market, owned by the firm, and supplied by the firm's owner.

Question 17

Which of the following is part of a firm's opportunity cost of production?
I.wages
II.utility costs
III.interest on a bank loan
IV.interest forgone on funds used to buy capital equipment

A)I only
B)II only
C)III only
D)IV only
E)I, II, III, and IV

Question 18

Economic profit equals total revenue minus

A)the cost of resources bought in the market.
B)the implicit rental rate.
C)the opportunity cost of production.
D)the cost of resources supplied by the owner.
E)the cost of resources owned by the firm.

Question 19

Marc bought a new car last year for $10,000.He can now sell the car for $8,500.To buy this year's model he would have to pay $11,000.Marc also had to take out a $9,000 loan to buy the car,which had to be paid back in yearly installments of $3,300 per year over three years.What is the implicit rental rate of the first year's use of the car?

A)$2,800
B)$1,300
C)$1,800
D)$13,300
E)$4,800

Question 20

A profit-maximizing firm is constrained by

A)demand for its product.
B)limited resources.
C)available technology.
D)limited information.
E)all of the above.

Question 21

To produce a unit of output,Alphaworks uses 10 hours of labour and 5 kilograms of material.Betaworks uses 5 hours of labour and 10 kilograms of material,and Gammaworks uses 10 hours of labour and 10 kilograms of material.If labour costs $10 per hour and material costs $5 per kilogram,which firm is economically efficient?

A)Alphaworks only
B)Betaworks only
C)Gammaworks only
D)Alphaworks and Betaworks
E)Alphaworks and Gammaworks

Question 22

A firm that is technologically efficient

A)always makes an economic profit.
B)must be economically efficient, but a firm that is economically efficient is not always technologically efficient.
C)must be economically efficient, and a firm that is economically efficient must always be technologically efficient.
D)is not always economically efficient, and a firm that is economically efficient is not always technologically efficient.
E)is not always economically efficient, but a firm that is economically efficient must always be technologically efficient.

Question 23

Use the table below to answer the following questions.
Table 10.2.2
Three methods of making one medical hologram

Refer to Table 10.2.2.If the price of labour is $20 per unit and the price of capital is $10 per unit,which method is economically efficient?

A)1 only
B)2 only
C)3 only
D)2 and 3 only
E)1 and 3 only

Question 24

A firm that uses the latest technology ________ technologically efficient because ________.

A)is not necessarily;the firm might not use the least amount of inputs to produce a given output
B)is not necessarily;new technology is more expensive than old technology
C)is;efficiency is about costs rather than when the technology was developed
D)is;new technology isn't developed unless it is efficient
E)is;most consumers want access to the latest technology

Question 25

Some firms use large amounts of capital and small amounts of labour,while others use small amounts of capital and large amounts of labour to

A)use surpluses of labour and capital and eliminate unemployment of these resources.
B)use the best available technology.
C)use the resources that are most readily available.
D)maximize profit.
E)maximize production.

Question 26

Which one of the following statements is true?

A)All technologically efficient methods are also economically efficient.
B)All economically efficient methods are also technologically efficient.
C)Technological efficiency changes with changes in relative input prices.
D)Technologically efficient firms will be more likely to survive than economically efficient firms.
E)none of the above

Question 27

Use the information below to answer the following questions.
Fact 10.2.1
Consider the following three methods of preparing your tax return.Method A uses a personal computer (cost equal to $1,000)and 1 hour of your time.Method B uses a calculator (cost equal to $30)and 12 hours of your time.Method C uses pen and paper (cost equal to $1)and 2 days (16 hours)of your time.
Consider Fact 10.2.1.Which production method is technologically inefficient?

A)A
B)B
C)C
D)all of the above
E)none of the above

Question 28

Emma owns a firm that produces umbrellas.Currently,Emma produces 2,500 umbrellas a day.Emma cannot produce more umbrellas in a day unless she purchases another machine or else hires more workers.Emma is ________ efficient.

A)economically
B)economically and technologically
C)technologically
D)not
E)capital and labour

Question 29

In a partnership,each partner is legally liable for

A)all the debts of the partnership.
B)the fraction of the debts corresponding to the fraction of ownership.
C)50 percent of the debt.
D)all debts of the partnership limited by the personal wealth of the partner.
E)an amount of debt limited to the amount of the partner's investment in the partnership.

Question 30

Which one of the following statements is not true?

A)A production process is technologically efficient only if it is producing a given output at the lowest possible cost.
B)If a process is economically efficient, it must be technologically efficient as well.
C)Economic efficiency depends on the relative price of inputs, while technological efficiency does not.
D)Economically efficient firms will be more likely to survive than economically inefficient firms.
E)Technologically efficient firms are more likely to survive than technologically inefficient firms.

Question 31

Use the table below to answer the following questions.
Table 10.2.1

Refer to Table 10.2.1.If the price of labour is $10 per unit and the price of capital is $20 per unit,which method is economically efficient?

A)1 only
B)2 only
C)3 only
D)all of the above
E)1 and 3 only

Question 32

Use the table below to answer the following questions.
Table 10.2.2
Three methods of making one medical hologram

In Table 10.2.2,which method of making a medical hologram is technologically efficient?

A)1 only
B)2 only
C)3 only
D)all of the above
E)1 and 3 only

Question 33

The profits of a sole proprietorship are

A)taxed twice.
B)subject to a corporate tax.
C)not taxed.
D)exempt from taxation.
E)treated as the owner's income.

Question 34

Use the table below to answer the following questions.
Table 10.2.1

Refer to Table 10.2.1,which shows three methods for making photon torpedoes.Which method is technologically efficient?

A)1 only
B)2 only
C)3 only
D)all of the methods
E)1 and 3 only

Question 35

Most establishments in Canada

A)employ between 5 and 99 people.
B)employ more than 100 people.
C)employ fewer than 5 people.
D)employ more than 500 people.
E)are partnerships.

Question 36

In the relationship between the owner of a bakery and the baker,the owner is

A)an agent, as is the baker.
B)an agent and the baker is a principal.
C)a principal and the baker is an agent.
D)a principal, as is the baker.
E)neither a principal nor an agent, but the baker is an agent.

Question 37

The legal responsibility for debts incurred by a sole proprietorship falls upon

A)the shareholders.
B)the partners of the sole proprietorship.
C)the owner.
D)the creditors.
E)the managers.

Question 38

A firm with a single owner who has unlimited liability is

A)a corporation.
B)a sole proprietorship.
C)a limited partnership.
D)an unlimited partnership.
E)a cooperative.

Question 39

Typical examples of a partnership would include which one of the following?

A)a law firm
B)a corner drugstore
C)an automobile manufacturer
D)a bank
E)a freelance writer

Question 40

Use the information below to answer the following questions.
Fact 10.2.1
Consider the following three methods of preparing your tax return.Method A uses a personal computer (cost equal to $1,000)and 1 hour of your time.Method B uses a calculator (cost equal to $30)and 12 hours of your time.Method C uses pen and paper (cost equal to $1)and 2 days (16 hours)of your time.
Consider Fact 10.2.1.Choose the best statement.

A)When your wage rate is $5 per hour, the economically efficient method is method C.
B)When your wage rate is $50 per hour, the economically efficient method is method B.
C)When your wage rate is $500 per hour, the economically efficient method is method A.
D)all of the above
E)B and C only

Question 41

Firm strategies for coping with the principal-agent problem are

A)ownership, incentive pay, and long-term contracts.
B)sole proprietorship, partnership, and the corporation.
C)economies of scale, scope, and team production.
D)technology, information, and the market.
E)ownership, scope, and the market.

Question 42

Use the table below to answer the following questions.
Table 10.4.1

Refer to Table 10.4.1.The four-firm concentration ratio for the pizza sellers is

A)40 percent.
B)100 percent.
C)80 percent.
D)33 percent.
E)12.5 percent.

Question 43

Mr.Brown opens his restaurant as a sole proprietorship.After a year of disastrous reviews,he has gone deeply into debt.His liability is

A)zero;he has already lost all his money.
B)the amount of his original investment.
C)limited only by his entire wealth.
D)limited to assets owned by the restaurant.
E)depends upon how much money he has in his savings account.

Question 44

Susan invests $1,000 to buy shares of TooNew stock.The company declares bankruptcy,leaving many debts unpaid,including Susan's $1,000 investment.Susan has a personal net worth of $50,000.What will be Susan's final net worth if TooNew has total unpaid debts of $30,000?

A)$19,000
B)$21,000
C)$49,000
D)$51,000
E)$20,000

Question 45

Which one of the following statements describes a market that is monopolistically competitive?

A)The presence of significant barriers to entry.
B)The products produced by the firms are identical.
C)Many firms compete by making similar but slightly different products.
D)There is a small number of large firms.
E)The product produced by one firm has no close substitutes.

Question 46

A firm with one or more owners of limited liability is

A)a sole proprietorship.
B)a partnership.
C)a conglomerate.
D)a corporation.
E)a public company.

Question 47

Firms cope with uncertainty and incomplete information by using

A)sole proprietorship, limited liability, and market coordination.
B)ownership, incentive pay, and long-term contracts.
C)team production, economies of scale, and transactions costs.
D)the market, the firm, and internal organization.
E)team production, economies of scale, and transaction costs.

Question 48

An example of the principal-agent problem occurs when

A)an agent is more motivated than the principle to provide a high-quality good or service.
B)managers try to cope with employees that are inefficient.
C)sole proprietors don't receive any money payment for their entrepreneurial skills.
D)managers devise penalties that eliminate employee waste.
E)managers devise incentives that encourage employees to act in the owner's behalf.

Question 49

Use the table below to answer the following questions.
Table 10.4.1

Refer to Table 10.4.1.The four-firm concentration ratio for taco stands is

A)15 percent.
B)100 percent.
C)80 percent.
D)33 percent.
E)30 percent.

Question 50

The principal-agent problem exists when

A)there is no command system in place.
B)firms operate as sole proprietorships.
C)agents do not act in the best interest of principals.
D)principals do not act in the best interest of agents.
E)the future value of money is more than its current value.

Question 51

Firms organize production by using

A)command systems only.
B)incentive systems only.
C)command and incentive systems.
D)market systems only.
E)principal-agent systems only.

Question 52

A golf club manufacturer pays its workers based on the number of sets of clubs they produce.This firm

A)organizes production based on a command system.
B)does not have a principal-agent problem.
C)is a sole proprietorship.
D)organizes production based on an incentive system.
E)is a corporation.

Question 53

Which one of the following is an advantage of a corporation relative to a proprietorship or partnership?

A)Owners have limited liability.
B)Profits are taxed once.
C)difficult to raise money
D)no principal-agent problems
E)None of the above.

Question 54

A sole proprietorship

A)dies with the owner.
B)is the same as a partnership.
C)always bring a higher return to its owner than a corporation brings to its owners.
D)is a not-for-profit firm.
E)has a complex management structure.

Question 55

Federal Express enters into contracts with independent truck operators who offer FedEx service and who are rewarded by the volume (cubic feet)of packages they carry.
FedEx does not hire more independent drivers because

A)it is concerned about a possible downturn in the economy and the effects of overexpansion.
B)it cannot afford more trucks and more drivers.
C)of the principal-agent problem.
D)it is a corporation, so it wants to have a limited number of independent truck owners operating as proprietorships.
E)trucks are not a technologically efficient method of transporting parcels.

Question 56

The possibility that an employee may not work hard is an example of the

A)limited liability problem.
B)principal-agent problem.
C)transactions cost problem.
D)technological efficiency problem.
E)partnership problem.

Question 57

One difference between perfect competition and monopolistic competition is

A)firms in a perfectly competitive market produce similar but slightly different products.
B)in perfect competition, the product produced has no close substitutes.
C)monopolistic competition has barriers to entry, whereas perfect competition has none.
D)firms in monopolistic competition have some degree of market power.
E)a small number of firms compete in a monopolistically competitive market and a large number of firms compete in a perfectly competitive market.

Question 58

What is a disadvantage of a corporation relative to a sole proprietorship or partnership?

A)Owners have unlimited liability.
B)Profits are taxed twice;as corporate profits and as dividend income and capital gains to stockholders.
C)high cost of capital
D)perpetual life
E)None of the above.

Question 59

It is a disadvantage of ________ that retained profits are taxed twice.
It is a disadvantage of ________ that bad decisions are not checked by the need for consensus.

A)a sole proprietorship;both a partnership and a sole proprietorship
B)a corporation;a sole proprietorship
C)both a partnership and a sole proprietorship;a partnership
D)a corporation;both a partnership and a sole proprietorship
E)both a corporation and a partnership;a sole proprietorship

Question 60

A firm with two or more owners who have unlimited liability is

A)a sole proprietorship.
B)a partnership.
C)a conglomerate.
D)a corporation.
E)a public company.

Question 61

One difference between oligopoly and monopolistic competition is

A)there is a smaller number of firms in a monopolistically competitive market than in an oligopoly.
B)in oligopolies firms make slightly different products whereas in monopolistic competition the products are identical.
C)monopolistic competition has barriers to entry, whereas oligopoly has none.
D)fewer firms compete in an oligopoly than in a monopolistically competitive market.
E)in oligopolies, firms are typically smaller in size.

Question 62

An industry with a high four-firm concentration ratio may have little monopoly power if

A)its production is geographically concentrated.
B)its barriers to entry are low.
C)its barriers to entry are high.
D)there are no international producers of the product.
E)there are no close substitutes for its product.

Question 63

When the Herfindahl-Hirschman Index (HHI)is greater than 1,800,

A)the market is very competitive.
B)a monopoly exists.
C)there are many producers in the market.
D)the market is moderately competitive.
E)the market is uncompetitive.

Question 64

A four-firm concentration ratio of less than 60 percent indicates

A)a monopoly.
B)a market that is dominated by a few firms.
C)a competitive market.
D)an oligopoly.
E)an absence of competition.

Question 65

A provincial phone company like SaskTel likely has

A)a high four-firm concentration ratio in the province, but a low one nationally.
B)a low four-firm concentration ratio in the province, but a high one nationally.
C)a low four-firm concentration ratio in the province and nationally.
D)a high four-firm concentration ratio in the province and nationally.
E)a four-firm concentration ratio of zero.

Question 66

If a market is shared equally by four firms,the Herfindahl-Hirschman Index is

A)1/4.
B)4.
C)25.
D)100.
E)2,500.

Question 67

The Herfindahl-Hirschman Index is calculated as

A)the cube of the percentage market share of each firm summed over the largest 100 firms.
B)the square of the percentage market share of each firm summed over the largest 50 firms or summed over all the firms if there are fewer than 50.
C)the square of the percentage market share of each firm summed over the largest 20 firms.
D)double the market share of the five largest firms.
E)none of the above.

Question 68

In a perfectly competitive market,the four-firm concentration ratio is

A)almost zero.
B)50 percent.
C)100 percent.
D)75 percent.
E)25 percent.

Question 69

In a monopoly,the four-firm concentration ratio is

A)75 percent.
B)100 percent.
C)almost zero.
D)25 percent.
E)50 percent.

Question 70

A market structure where a small number of firms compete occurs in

A)perfect competition.
B)monopolistic competition.
C)the worldwide market for wheat, corn, and rice.
D)oligopoly.
E)monopoly.

Question 71

What is the maximum value of the Herfindahl-Hirschman Index?

A)1
B)1,000,000
C)100,000
D)10,000
E)1,000

Question 72

The four-firm concentration ratio measures the share of the largest four firms in total industry

A)profit.
B)sales.
C)cost.
D)capital.
E)loss.

Question 73

A market in which the Herfindahl-Hirschman Index (HHI)lies between 1,000 and 1,800 is regarded as being

A)a monopoly.
B)an oligopoly.
C)a perfectly competitive market.
D)a moderately competitive market.
E)a potential matter of concern for regulators.

Question 74

A four-firm concentration ratio that exceeds 60 percent indicates

A)a perfectly competitive market.
B)a monopolistically competitive market.
C)a monopoly.
D)an oligopoly.
E)a competitive market.

Question 75

Which of the following industries in Canada has the highest four-firm concentration ratio?

A)audio and video equipment
B)clothing
C)bakery items
D)fabrics
E)tobacco products

Question 76

In a perfectly competitive market,the Herfindahl-Hirschman Index (HHI)

A)is small.
B)is usually greater than 5,000.
C)is greater than 1,000 but less than 2,000.
D)lies between 1,200 and 1,500.
E)is greater than 10,000.

Question 77

The Herfindahl-Hirschman Index (HHI)is the square of the percentage market share of each firm summed over the ________ firms in a market.

A)largest 60
B)largest 50
C)smallest 50
D)largest 75
E)smallest 60

Question 78

The purpose of calculating the concentration ratio is

A)to obtain the firm's total profit.
B)to obtain the firm's production cost.
C)to measure the losses the firm incurred.
D)to measure the extent to which the market is dominated by a small number of firms.
E)to distinguish between the firm's total profit and production cost.

Question 79

Where the Herfindahl-Hirschman Index is less than 1,000,the market is regarded as

A)a monopoly.
B)an oligopoly.
C)competitive.
D)regulated.
E)none of the above.

Question 80

The four-firm concentration ratio tells us the percentage of ________ for the four largest firms in an industry.

A)employment
B)accounting profit
C)economic profit
D)the value of sales
E)physical output